<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 11, 1997
REGISTRATION NO. 333-29523
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
CORPORATEFAMILY SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
TENNESSEE 8351 62-1302117
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
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209 TENTH AVENUE SOUTH, SUITE 300
NASHVILLE, TENNESSEE 37203-4173
(615) 256-9915
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
---------------------
MARGUERITE W. SALLEE
PRESIDENT AND CHIEF EXECUTIVE OFFICER
CORPORATEFAMILY SOLUTIONS, INC.
209 TENTH AVENUE SOUTH, SUITE 300
NASHVILLE, TENNESSEE 37203-4173
(615) 256-9915
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
COPIES TO:
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<S> <C>
JAMES H. CHEEK, III HENRY D. KAHN
BASS, BERRY & SIMS PLC PIPER & MARBURY L.L.P.
FIRST AMERICAN CENTER 36 SOUTH CHARLES STREET
NASHVILLE, TENNESSEE 37238 BALTIMORE, MARYLAND 21201
(615) 742-6200 (410) 539-2530
</TABLE>
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 (the "Securities Act"), check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED AUGUST 11, 1997
2,350,000 SHARES
(CORPORATEFAMILY LOGO)
COMMON STOCK
Of the 2,350,000 shares of Common Stock offered hereby, 1,350,000 shares
are being sold by CorporateFamily Solutions, Inc. (the "Company") and 1,000,000
shares are being sold by the Selling Shareholders. The Company will not receive
any proceeds from the sale of shares of Common Stock by the Selling
Shareholders. See "Principal and Selling Shareholders."
Prior to this offering (the "Offering"), there has been no public market
for the Common Stock of the Company. It is currently estimated that the initial
public offering price will be between $8.00 and $10.00 per share. See
"Underwriting" for a discussion of the factors considered in determining the
initial public offering price. Application has been made for quotation of the
Common Stock on the Nasdaq National Market under the symbol "CFAM."
SEE "RISK FACTORS" COMMENCING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<CAPTION>
====================================================================================================
Proceeds to
Price to Underwriting Proceeds to Selling
Public Discount (1) Company (2) Shareholders
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share....................... $ $ $ $
Total(3)........................ $ $ $ $
====================================================================================================
</TABLE>
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting expenses payable by the Company, estimated at $700,000.
(3) The Company and certain Selling Shareholders have granted the Underwriters a
30-day option to purchase up to 51,386 and 301,114 additional shares,
respectively, of Common Stock, solely to cover over-allotments, if any. If
the Underwriters exercise this option in full, the total Price to Public,
Underwriting Discount, Proceeds to Company and Proceeds to Selling
Shareholders will be $ , $ , $ and $ ,
respectively. See "Principal and Selling Shareholders" and "Underwriting."
The shares of Common Stock are offered by the several Underwriters named
herein, subject to receipt and acceptance by them and subject to their right to
reject any order in whole or in part. It is expected that delivery of the
certificates representing such shares will be made against payment therefor at
the office of Montgomery Securities on or about , 1997.
------------------------
MONTGOMERY SECURITIES J.C. BRADFORD & CO.
, 1997
<PAGE> 3
Certain persons participating in this Offering may engage in transactions
that stabilize, maintain, or otherwise affect the price of the Common Stock.
Such transactions may include stabilizing, the purchase of Common Stock to cover
syndicate short positions and the imposition of penalty bids. For a description
of these activities, see "Underwriting."
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and consolidated financial
statements, including the notes thereto, appearing elsewhere in this Prospectus.
Except as otherwise indicated, all information in this Prospectus (i) gives
effect to a 0.65-for-1 stock split of the Company's Common Stock to be effected
immediately prior to the Offering, (ii) gives effect to the conversion of all of
the Company's outstanding Series A Preferred Stock into 1,169,935 shares of
Common Stock in connection with the Offering, and (iii) assumes no exercise of
the Underwriters' over-allotment option. This Prospectus contains
forward-looking statements that involve risks and uncertainties. The Company's
actual results may differ materially from the results discussed in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed in "Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business," as well as those occurring elsewhere in this Prospectus. Unless the
context otherwise requires, all references to the "Company" in this Prospectus
shall include CorporateFamily Solutions, Inc. and its subsidiaries. All
references to years contained in this Prospectus relate to the Company's fiscal
years.
THE COMPANY
CorporateFamily Solutions, Inc. is a leading national provider of a broad
range of management and consulting services for employers seeking to create a
"family friendly" work environment by providing their employees with workplace
child care, education and other family support programs. The Company manages
employer-sponsored Family Centers, built and equipped by an employer at or near
its offices, providing high quality services such as early childhood education,
child care, back-up child care, kindergartens, get-well care, summer camps, and
parent support services. The Company currently manages 87 Family Centers for 65
corporate clients in 27 states and has 17 centers under development, including
centers for nine new corporate clients. Eleven of the Company's corporate
clients operate multiple Family Centers. In addition, the Company provides
work/life consulting services to help employers realize the benefits of work and
family programs and policies and to align work/life concerns of working families
with business strategies of employers. Consulting services provided by the
Company include feasibility studies, work/life strategic planning, return on
investment analyses and development of work/life programs and policies.
Work/life services include those services and programs that an employer may
offer to employees to help employees better manage the demands of the workplace
and home. During 1996, the Company provided consulting services to 25 corporate
clients. The Company's clients include many of America's best known
corporations, such as AlliedSignal Inc., Barnett Banks, Inc., The Boeing
Company, Campbell Soup Company, The Chase Manhattan Corporation, Citicorp,
Columbia/HCA Healthcare Corporation, Eli Lilly and Company, J.C. Penney Company,
Inc., Johnson & Johnson, Marriott International, Inc., MBNA Corporation, Merck &
Co., Inc., NationsBank Corporation, Owens Corning, S.C. Johnson & Son, Inc., and
USAA.
The Company believes it is positioned to take advantage of two related
trends in corporate America: (i) the changing profile of the work force with an
increased number of dual income households and working parents and (ii) the
recognition by employers that responding to family needs of employees is an
essential strategy to attract, retain and motivate their employees. The
resulting demand for work and family services also reflects an increasing
awareness by employers that helping employees balance work and family
responsibilities and creating a work environment that facilitates that balance
will increase productivity on the job. In response to these trends, the Company
seeks to establish management and consulting relationships with major employers
interested in providing a broad range of high quality work and family services
to meet the needs of their employees.
The Company's growth strategy is to develop new corporate clients, expand
existing client relationships, develop new services and products and pursue
strategic acquisitions. Since January 1, 1993, the Company has increased the
number of corporate clients from 21 to 65, including 34 of the 1996 "Fortune
500" largest corporations in America, and has increased the number of Family
Centers from 24 to 87. Revenue has correspondingly increased from $17.0 million
in 1993 to $62.9 million in 1996, and operating income increased from a loss of
$1.1 million in 1993 to a profit of $1.9 million in 1996. A significant portion
of this growth was attributable to the Company's acquisition in October, 1995 of
Resources for Child Care Management, Inc.
3
<PAGE> 5
("RCCM"), an operator of 21 employer-sponsored child care centers (nine of which
were operated for Fortune 500 corporations). The Company expanded its consulting
services during the second half of 1996 and believes that such services enhance
relationships with existing clients and will provide opportunities for
developing new relationships with other employers. The Company has pilot
programs for new services under development or evaluation, including the
management of employer-sponsored elementary schools, tutoring and other
education services, elder care, and the distribution of educational books, toys,
games and software for family members of all ages.
The Company was founded in 1987 to address a growing demand for high
quality, employer-sponsored child care and has evolved to provide a broad range
of work and family services for employers and their employees. The Company was
founded by Marguerite Sallee, President and Chief Executive Officer; Lamar
Alexander, former Secretary of Education and former Governor of Tennessee; Honey
Alexander, former Vice Chairman of the Corporation for Public Broadcasting; Bob
Keeshan, better known as television's "Captain Kangaroo;" and Brad Martin,
Chairman and Chief Executive Officer of Proffitt's, Inc., a retail department
store chain. The Company's executive offices are located at 209 Tenth Avenue
South, Suite 300, Nashville, Tennessee, and its telephone number is (615)
256-9915.
THE OFFERING
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Common Stock offered by the Company......................... 1,350,000 shares
Common Stock offered by the Selling Shareholders............ 1,000,000 shares
Common Stock to be outstanding after the Offering........... 4,416,848 shares(1)
Use of proceeds............................................. Repayment of indebtedness,
working capital, and for
general corporate purposes,
including possible
acquisitions.
Proposed Nasdaq National Market symbol...................... CFAM
</TABLE>
- ---------------
(1) Excludes (i) 1,546,421 shares of Common Stock, with a weighted average
exercise price per share of $7.26, reserved for issuance upon the exercise
of stock options granted pursuant to the Company's stock option plans; (ii)
26,000 shares of Common Stock reserved for issuance upon exercise of
outstanding warrants to purchase Common Stock at an exercise price of $6.15;
(iii) 475,000 shares of Common Stock reserved for future grant under the
Company's stock option plans; and (iv) 100,000 shares of Common Stock
reserved for issuance pursuant to the Company's employee stock purchase
plan. Using the modified treasury stock method, the outstanding options and
warrants represent 689,051 shares of Common Stock equivalents, assuming an
offering price of $9.00 per share. See "Management -- Compensation Pursuant
to Plans" and "Description of Capital Stock -- Warrants."
4
<PAGE> 6
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AND SELECTED OPERATING DATA)
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<CAPTION>
YEAR ENDED(1) SIX MONTHS ENDED
------------------------------------------ ----------------------
DECEMBER 30, DECEMBER 29, DECEMBER 27, JUNE 28, JUNE 27,
1994 1995 1996 1996 1997
------------ ------------ ------------ -------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenue................................. $ 24,513 $ 36,920 $ 62,926 $ 30,079 $36,381
Operating expenses...................... 21,092 32,708 55,589 26,479 32,028
Selling, general and administrative
expenses.............................. 2,958 3,525 4,659 2,363 2,785
Depreciation and amortization........... 387 520 758 381 397
------------ ------------ ------------ -------- -----------
Operating income........................ 76 167 1,920 856 1,171
Interest expense, net................... 50 86 343 194 125
------------ ------------ ------------ -------- -----------
Income before income taxes.............. 26 81 1,577 662 1,046
Income tax expense (benefit)............ -- (460) (1,159) 26 500
------------ ------------ ------------ -------- -----------
Net income.............................. $ 26 $ 541 $ 2,736 $ 636 $ 546
========== ========== ========== ======= =========
Net income per share(2)(3).............. $ 0.01 $ 0.19 $ 0.75 $ 0.20 $ 0.17
========== ========== ========== ======= =========
Weighted average number of common and
common equivalent shares
outstanding(2)........................ 2,702 3,398 4,102 4,082 4,072
SELECTED OPERATING DATA (AT END OF PERIOD)(1):
Family Center clients(4)................ 41 58 65 59 65
Family Centers(5)....................... 48 75 85 81 87
Program capacity(6)..................... 5,295 9,113 10,702 10,178 11,278
</TABLE>
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<CAPTION>
JUNE 27, 1997
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ACTUAL AS ADJUSTED(7)
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BALANCE SHEET DATA:
Working capital....................................................... $ 2,531 $ 10,082
Total assets.......................................................... 19,391 26,031
Long-term debt, including current maturities.......................... 3,960 --
Shareholders' equity.................................................. 7,672 18,272
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(1) The Company's fiscal year ends on the Friday closest to December 31. In
October 1995, the Company acquired all of the outstanding capital stock of
RCCM, an operator of 21 employer-sponsored child care centers. The
transaction was accounted for as a purchase, and consideration paid
consisted of $3.4 million in cash and 324,995 shares of Common Stock.
(2) Net income per share is computed by dividing net income by the weighted
average number of common and common equivalent shares outstanding during the
year, which includes additional dilution related to conversion of
outstanding preferred stock, stock options and warrants as computed under
the modified treasury stock method. The additional dilution related to stock
options granted within the last twelve months has been computed using the
treasury stock method and has been included in common equivalent shares
outstanding for all periods presented. See the Company's consolidated
financial statements and note 8 thereto.
(3) Supplemental pro forma net income per share of $0.71 for the year ending
December 27, 1996 and $0.17 for the six months ended June 27, 1997 was
computed by adjusting the historical net income per share as reflected above
for the reduction in interest expense and after giving effect to the
estimated number of shares that would be required to be sold (at an assumed
initial public offering price of $9.00 per share) to repay $4.4 million and
$4.0 million in debt at December 27, 1996 and June 27, 1997, respectively.
(4) A Family Center client is defined as an entity that as of the applicable
date was under contract with the Company for the management of one or more
open and operating Family Centers.
(5) Family Centers are defined as the facilities which the Company is engaged to
manage and operate on behalf of its Family Center clients.
(6) Program capacity is defined as the maximum aggregate number of individuals
that the Company will enroll in the services and programs at its Family
Centers to be in compliance with National Association for the Education of
Young Children ("NAEYC") standards. As of each of the respective dates, the
state licensed capacity was 6,361, 10,487, 12,440, 11,902 and 13,122
individuals, respectively.
(7) Adjusted to give effect to the sale of the 1,350,000 shares of Common Stock
offered by the Company hereby, at an assumed initial public offering price
of $9.00 per share, and the application of the estimated net proceeds
therefrom as described in "Use of Proceeds" and "Capitalization."
5
<PAGE> 7
RISK FACTORS
In addition to the other information contained in this Prospectus,
prospective investors should carefully consider the following factors in
evaluating an investment in the shares of Common Stock offered hereby.
Management of Growth. The Company has experienced substantial growth
during the past several years through internal growth and by acquisition. The
Company's ability to experience future growth will depend upon a number of
factors, including the ability to further develop existing client relationships
and to obtain new client relationships, the expansion of services and programs
offered by the Company, the maintenance of high quality services and programs
and the hiring and training of qualified management, regional vice presidents,
center directors and other personnel. The Company may experience difficulty in
attracting and retaining qualified personnel in various markets necessary to
meet growth opportunities. Hiring and retaining qualified personnel may require
increased salaries and enhanced benefits in more competitive markets, which
could result in a material adverse effect on the Company's business, results of
operations and financial condition. Sustaining growth may require the
implementation of enhancements to operational and financial systems and will
also depend on the Company's ability to expand its sales and marketing force.
There can be no assurance that the Company will be able to manage its expanding
operations effectively or that it will be able to maintain or accelerate its
growth, and any failure to do so could have a material adverse effect on the
Company's business, results of operations and financial condition. See
"Business -- Growth Strategy" and "-- Operations."
Market Acceptance of Work and Family Services. The Company's business
strategy depends on employers recognizing the value of work and family services.
There can be no assurance that there will be continued growth in the number of
employers that view work-site family services as cost-effective or beneficial to
their work forces. Although employer-sponsored on-site, near-site or consortium
centers have gained some degree of acceptance during the past decade, less than
2% of employers financially supported such centers in 1995. Any negative change
in current corporate acceptance of financially supported child care could have a
material adverse effect on the Company's business, results of operations,
financial condition and growth prospects. There can be no assurance that
demographic trends, including an increasing percentage of mothers in the work
force, will continue to lead to increased market share for the center-based
segment in general and the work-site segment in particular.
Competition. The Company competes for corporate clients as well as
individual enrollment in a highly fragmented and competitive market. In the
competition for corporate clients, the Company primarily competes with other
organizations which focus on the work-site segment of the child care market and
with certain center-based child care chains that have divisions which compete
for corporate opportunities. The Company also competes with a diverse group of
large and small competitors for a range of child care and other work and family
services including work/life, employee benefits and management consultants. Some
of these competitors have significantly greater financial resources and may be
willing to enter into contract models, invest initial capital in facilities or
enter into other financial arrangements that are not consistent with the
Company's business strategy. Many of these competitors offer consulting,
work-site child care and other services at lower prices than the Company. Some
of these competitors for corporate relationships have greater penetration than
the Company in certain geographic regions and multiple relationships with
corporate entities. Increased competition for corporate relationships on a
national or local basis could result in increased pricing pressure and loss of
market share, thereby having a material adverse effect on the Company's
business, results of operations and financial condition as well as its ability
to pursue its growth strategy successfully.
The Company believes its ability to compete successfully for enrollment at
a Family Center depends on a number of factors, including quality of services
and products, convenience and price. The Company is often at a price
disadvantage with respect to family child care providers, who operate at
standards lower than national accreditation standards at which the Company
operates and generally do not comply or are not required to comply with the same
health, safety, insurance and operational regulations as the Company. The
Company also competes with many not-for-profit providers of child care and
preschools, some of which are able to offer lower pricing than the Company. Many
of the Company's competitors in the center-based segment also offer child care
at a lower price than the Company, and some have substantially greater financial
resources than the
6
<PAGE> 8
Company or have greater name recognition. There can be no assurance that the
Company will be able to compete successfully against current and future
competitors or that competitive pressures faced by the Company will not have a
material adverse effect on its business, results of operations and financial
condition. See "Business -- Competition."
Dependence on Corporate Client Relationships. A significant portion of the
Company's business is derived from Family Centers associated with corporate
clients for which the Company provides work-site family services for single or
multiple sites pursuant to management contracts. While the specific terms of
such contracts vary, some management contracts are subject to early termination
by the corporate client without cause. While the Company has a history of
consistent contract renewals, there can be no assurance that future renewals
will be secured. In addition, a significant percentage of the Company's
corporate relationships are concentrated in the healthcare, financial services
and the pharmaceutical industries and could be threatened by changes in these
industries. The early termination or nonrenewal of a significant number of
corporate management contracts or the termination of a multiple-site corporate
client relationship could have a material adverse effect on the Company's
business, results of operations and financial condition.
Risks Associated with New Family Centers. For contracts where the Company
does not receive additional financial operating support from the employer
necessary to cover all costs during the enrollment building period, the Company
may incur operating losses at a Family Center. Such operating losses have been
incurred at certain centers for more than a year following the opening of such
centers; however, such losses, if any, have varied in amount and time duration
from center to center. The Company's contracts generally provide that the
Company may recover such initial losses out of future center level operating
profits. There can be no assurance that the Company will be able to negotiate
contracts that will provide funds to pay for such operating losses or that the
Company can grow the Family Center enrollment sufficiently to eliminate such
losses. In the event a Family Center cannot operate profitably, the Company may
elect to close a Family Center, which could result in additional expense to the
Company. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Changing Economic Conditions. The Company's revenue and net income are
subject to general economic conditions. A significant portion of the Company's
revenue is derived from employers which historically have reduced their
expenditures for work-site family services during economic downturns. Should the
economy weaken in any future period, these corporate clients may reduce or
eliminate their expenditures on work and family services, and prospective
clients may not commit resources to such services. These factors could have a
material adverse effect on the Company's business, results of operations and
financial condition.
Risks Associated with Acquisitions. The Company plans as part of its
growth strategy to evaluate the acquisition of other providers of work/life,
employer-sponsored child care and consulting services. While the Company reviews
acquisition candidates in the ordinary course of its business, the Company is
not currently a party to any agreements or negotiations with respect to any
material acquisitions. Acquisitions involve numerous risks, including potential
difficulties in the assimilation of acquired operations, diversion of
management's attention, negative financial impacts based on the amortization of
acquired intangible assets, the dilutive effects of the issuance of Common Stock
in connection with an acquisition and potential loss of key employees of the
acquired operation. No assurance can be given as to the success of the Company
in identifying, executing and assimilating acquisitions in the future. See "Use
of Proceeds" and "Business -- Growth Strategy."
Dependence on Key Management. The success of the Company is highly
dependent on the efforts, abilities, and continued services of its executive
officers and other key employees. The loss of any of the executive officers or
key employees could have a material adverse effect on the Company's business,
results of operations and financial condition. The Company believes that its
future success will depend upon its ability to continue to attract, motivate and
retain highly-skilled managerial, sales and marketing, regional and center
director personnel. Although the Company historically has been successful in
retaining the services of its senior management, there can be no assurance that
the Company will be able to do so in the future. See "Management -- Employment
Agreements."
7
<PAGE> 9
Ability to Obtain and Maintain Insurance; Adverse Publicity. The Company
currently maintains the following types of insurance policies: workers'
compensation, commercial general liability, automobile liability, commercial
property liability, student accident coverage, employment practices liability
and excess "umbrella" liability including coverage for child abuse and
molestation. These policies provide for a variety of coverages and are subject
to various limitations, exclusions and deductibles. To date, the Company has
been able to obtain insurance in amounts it believes to be appropriate. There
can be no assurance that the Company's insurance premiums will not increase in
the future as a consequence of conditions in the insurance business generally or
the Company's experience in particular. As a result of adverse publicity
concerning reported incidents of alleged abuse at child care centers and the
length of time before the expiration of applicable statutes of limitations for
the bringing of child abuse and personal injury claims (typically a number of
years after the child reaches the age of majority), some operators of child care
and family centers have had difficulty obtaining general liability insurance,
child abuse liability insurance or similar liability insurance or have been able
to obtain such insurance only at substantially higher rates. Any adverse
publicity concerning reported incidents of child abuse at any child care
centers, whether or not directly relating to or involving the Company, could
result in decreased enrollment at the Company's centers, termination of existing
corporate relationships, inability to attract new corporate relationships or
increased insurance costs, any of which could have a material adverse effect on
the Company's business, results of operations, and financial condition. See
"Business -- Insurance" and " -- Litigation."
Litigation. Because of the nature of its business, the Company is and
expects that in the future it may be subject to claims and litigation alleging
negligence, inadequate supervision and other grounds for liability arising from
injuries or other harm to the people it serves, primarily children. In addition,
claimants may seek damages from the Company for child abuse, sexual abuse and
other acts allegedly committed by Company employees. There can be no assurance
that lawsuits will not be filed, that the Company's insurance will be adequate
to cover liabilities resulting from any claim or that any such claim or the
publicity resulting from it will not have a material adverse effect on the
Company's business, results of operations, and financial condition including,
without limitation, adverse effects caused by increased cost or decreased
availability of insurance and decreased demand for the Company's services from
corporate sponsors and parents. See "Business -- Litigation."
Seasonality and Variability of Quarterly Operating Results. The Company's
revenue and results of operations fluctuate with the seasonal demands for child
care. The Company's revenue typically declines during the third quarter as a
result of decreased enrollments in its centers as parents withdraw their
children for vacations and their older children for entry into elementary
schools. A portion of the Company's costs are fixed costs, and where the Company
is responsible for such costs, the Company's results of operations are affected
by fluctuation in center and program utilization. The Company's quarterly
results of operations may also fluctuate based upon the number and timing of
center openings and/or acquisitions, the performance of new and existing
centers, the contractual arrangements under which centers are operated, the
change in the mix of such contractual arrangements, the timing and level of
consulting and development fees, center closings, competitive factors and
general economic conditions. The inability of existing centers to maintain their
current profitability, the failure of newly opened centers to contribute to
profitability and the failure to maintain and grow the consulting and
development services could result in additional fluctuations in the future
operating results of the Company on a quarterly or annual basis. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Unaudited Selected Quarterly Operating Results."
Impact of Governmental Regulation. The Company's Family Centers are
subject to numerous federal, state and local regulations and licensing
requirements. Although these regulations vary greatly from jurisdiction to
jurisdiction, government agencies generally review, among other things, the
adequacy of buildings and equipment, licensed capacity, the ratio of staff to
children, staff training, record keeping, the dietary program, the daily
curriculum and compliance with health and safety standards. Failure of a center
to comply with applicable regulations can subject it to governmental sanctions,
which might include fines, corrective orders, probation, or, in more serious
cases, suspension or revocation of the center's license to operate or an award
of damages to private litigants and could require significant expenditures by
the Company to bring its Family Centers into compliance. In addition, state and
local licensing regulations often provide
8
<PAGE> 10
that the license held by a family services company may not be transferred. As a
result, any transferee of a family services business (primarily child care) must
apply to any applicable administrative bodies for new licenses. There can be no
assurance that the Company would not have to incur material expenditures to
relicense centers it may acquire in the future. There can be no assurance that
government agencies will not impose additional restrictions on the Company's
operations which could adversely affect the Company's business, results of
operations, and financial condition. Although a limited number of the Company's
employees are paid at the minimum wage, the recent increase in the federal
minimum wage could result in a corresponding increase in the wages paid to the
Company's employees, which could have a material effect on the Company's
business, results of operations, and financial condition. See
"Business -- Regulation."
Control by Certain Shareholders. Upon completion of the Offering,
executive officers and directors, and their affiliates, will beneficially own an
aggregate of approximately 32.9% of the outstanding shares of Common Stock
(approximately 32.6% if the Underwriters' over-allotment option is exercised in
full). Accordingly, such persons, if they were to act in concert, would likely
be in a position to control the Company through their ability to significantly
affect the outcome of elections of members of the Board of Directors and the
decision whether to effect or prevent a merger or sale of assets, to adopt,
amend, or repeal the Company's Amended and Restated Charter (the "Charter") and
Amended and Restated Bylaws (the "Bylaws"), and to take certain other actions
requiring the vote or consent of the Company's shareholders. Such control could
also preclude an unsolicited acquisition of the Company and, consequently,
adversely affect the market price of the Common Stock. See "Management" and
"Principal and Selling Shareholders."
Shares Eligible for Future Sale. Upon consummation of the Offering, the
Company will have 4,416,848 shares of Common Stock issued and outstanding. The
2,350,000 shares of Common Stock sold in this Offering will be freely tradeable
without restriction or limitation under the Securities Act of 1933, as amended
(the "Securities Act"), except for shares purchased by "affiliates" (as defined
under the Securities Act). All of the remaining 2,066,848 shares of Common Stock
are "restricted securities" as that term is defined by Rule 144 promulgated
under the Securities Act. Of these shares, 228,107 will be eligible for sale in
the public market 90 days following the date of this Offering pursuant to Rule
144; of the persons holding these shares, no person holds more than 0.75% of the
outstanding shares. Furthermore, upon the expiration of lockup agreements with
the Underwriters 180 days after the date of this Prospectus (or earlier with the
consent of Montgomery Securities), an additional 1,838,741 shares of Common
Stock will be eligible for immediate sale pursuant to Rule 144 under the
Securities Act. Additional shares of Common Stock, including shares issuable
upon exercise of options, shares acquired pursuant to the Company's stock
purchase plan and warrants, will also become eligible for sale in the public
market from time to time. In addition, holders of 630,574 shares of Common Stock
following completion of the Offering are entitled to certain rights with respect
to the registration of such shares for sale under the Securities Act. See
"Shares Eligible for Future Sale," "Management -- Compensation Pursuant to
Plans" and "Description of Capital Stock -- Registration Rights."
Absence of Public Market; Possible Volatility of Stock Price. Prior to
this Offering, there has been no public market for the Company's Common Stock.
Application has been made for quotation of the Common Stock on the Nasdaq
National Market. There can be no assurance that a viable public market for the
Common Stock will develop or be sustained after the Offering or that purchasers
of the Common Stock will be able to resell their Common Stock at prices equal to
or greater than the initial public offering price. The initial public offering
price will be determined by negotiations among the Company, the Selling
Shareholders and the representatives of the Underwriters and may not be
indicative of the prices that may prevail in the public market after the
Offering is completed. Numerous factors, including announcements or fluctuations
in the Company's or its competitors' operating results, market conditions for
the Company's services or products, investor perception of the Company and of
the work and family services industry generally, the timing and announcement of
acquisitions by the Company or its competitors, government regulatory action, or
liquidity of the market for the Common Stock, could have a significant impact on
the future price of the Common Stock. In addition, the stock market in recent
years has experienced significant price and volume fluctuations that often have
been unrelated or disproportionate to the operating performance of companies.
These broad fluctuations may adversely affect the market price of the Common
Stock. See "Underwriting."
9
<PAGE> 11
Dilution. The purchasers of the Common Stock offered hereby will
experience immediate and significant dilution in net tangible book value of
$6.12 per share, and present shareholders will experience a material increase in
net tangible book value of $2.19 per share. See "Dilution."
Anti-Takeover Provisions. The Company's Charter and Bylaws will, after the
completion of the Offering, contain certain provisions that could make more
difficult the acquisition of the Company by means of a tender offer, a proxy
contest or otherwise. These provisions establish staggered terms for members of
the Company's Board of Directors and include advance notice procedures for
shareholders to nominate candidates for election as directors of the Company and
for shareholders to submit proposals for consideration at shareholders'
meetings. In addition, the Company will be subject to the Tennessee Business
Combination Act (the "Combination Act") of the Tennessee Business Corporation
Act ("TBCA") which limits transactions between a publicly held company and
"interested shareholders" (generally, those shareholders who, together with
their affiliates and associates, own 10% or more of the voting power of any
class or series of a Company's stock). The restrictions of the Combination Act
would not apply to those who were "interested shareholders" prior to the
consummation of the Offering. These provisions of the TBCA may have the effect
of deterring certain potential acquisitions of the Company. The Company's
Charter will provide for 10,000,000 authorized but unissued shares of Preferred
Stock, the rights, preferences, qualifications, limitations and restrictions of
which may be fixed by the Board of Directors without any further action by
shareholders. See "Description of Capital Stock."
Risks Associated with Forward-Looking Statements. This Prospectus contains
certain statements that are "forward-looking statements." Those statements
include, among other things, the discussions of the Company's business strategy
and expectations concerning developments in the work and family services
industry, the Company's market position, future operations, growth by
acquisitions and as internally generated, contribution margins and profitability
and liquidity and capital resources. When used in this Prospectus, the words
"anticipate," "believe," "estimate," "expect" and similar expressions are
intended to identify forward-looking statements. Investors in the Common Stock
offered hereby are cautioned that reliance on any forward-looking statements
involves risks and uncertainties, and that although the Company believes that
the assumptions on which the forward-looking statements contained herein are
reasonable, any of those assumptions could prove to be inaccurate, and as a
result, the forward-looking statements based on those assumptions also could be
incorrect. The uncertainties in this regard include, but are not limited to,
those identified in the risk factors discussed above. In light of these and
other uncertainties, the inclusion of a forward-looking statement herein should
not be regarded as a representation by the Company that the Company's plans and
objectives will be achieved. The Company does not intend to update any of these
forward-looking statements.
10
<PAGE> 12
USE OF PROCEEDS
The net proceeds to the Company from the sale of Common Stock offered
hereby, at an assumed initial public offering price of $9.00 per share, are
estimated to be $10.6 million (approximately $11.0 million if the Underwriters'
over-allotment option is exercised in full) after deduction of the underwriting
discount and estimated offering expenses payable by the Company. The Company
will not receive any proceeds from the sale of Common Stock by the Selling
Shareholders. Approximately $4.0 million of the net proceeds will be used to
repay indebtedness outstanding under the Company's loans (the "Loans"). The
indebtedness outstanding under the Loans was incurred primarily to finance the
acquisition of RCCM in October 1995, bears interest ranging from 8.0% to 10.0%
and has final maturities from 1998 to 2010. The Company has received a
commitment for a revolving credit facility to be completed in connection with
the closing of this Offering to provide up to $5.0 million of borrowings.
The Company intends to use the balance of the net proceeds for working
capital to further develop its services and products and for other general
corporate purposes, including possible acquisitions of companies engaged in
similar or complementary businesses. Although the Company regularly evaluates
acquisition opportunities and conducts preliminary discussions regarding
acquisitions, the Company has no present agreements, arrangements, or
commitments with respect to, and no portion of the net proceeds has been
allocated for, any such transaction. Pending such uses, the net proceeds will be
invested in short-term, investment-grade interest-bearing securities.
DIVIDEND POLICY
The Company has never declared or paid a cash dividend on its Common Stock.
It is the present policy of the Board of Directors to retain all earnings to
support operations and to finance expansion of the Company's business;
therefore, the Company does not anticipate declaring or paying dividends on the
Common Stock in the foreseeable future. The declaration and payment of cash
dividends in the future will be at the Board of Directors' discretion and will
depend on the Company's earnings, financial condition, capital needs and other
factors deemed pertinent by the Board of Directors, including limitations, if
any, on the payment of dividends under state law and any then-existing credit
agreement. Pursuant to the terms of the outstanding Loans, the Company is
prohibited from declaring or paying cash dividends.
11
<PAGE> 13
DILUTION
The net tangible book value of the Company at June 27, 1997 was
approximately $2.1 million, or $0.69 per share of Common Stock. Net tangible
book value per share represents the amount of the Company's total tangible
assets less total liabilities, divided by the number of shares of Common Stock
outstanding. After giving effect to the sale by the Company of the 1,350,000
shares of Common Stock offered hereby at an assumed initial public offering
price of $9.00 per share, deducting the underwriting discount and estimated
offering expenses payable by the Company and applying the estimated net proceeds
therefrom as set forth under "Use of Proceeds," the adjusted net tangible book
value of the Company as of June 27, 1997 would have been approximately $12.7
million, or $2.88 per share of Common Stock. This represents an immediate
increase in the pro forma net tangible book value of $2.19 per share of Common
Stock to existing shareholders and an immediate dilution in pro forma net
tangible book value of $6.12 per share of Common Stock to investors purchasing
Common Stock in this Offering. The following table illustrates this dilution on
a per-share basis:
<TABLE>
<S> <C> <C>
Assumed initial public offering price................................ $9.00
Net tangible book value per share.................................... $0.69
Increase per share attributable to new investors..................... 2.19
-----
Pro forma net tangible book value per share, as adjusted for the
Offering........................................................... 2.88
-----
Dilution per share to new investors.................................. $6.12
=====
</TABLE>
The following table summarizes the number of shares of Common Stock
purchased from the Company during the last five years, the total consideration
paid to the Company, and the average price per share paid by the Company's
existing shareholders and to be paid by the new investors purchasing shares of
Common Stock from the Company in the Offering (before deducting the underwriting
discount and estimated offering expenses payable by the Company):
<TABLE>
<CAPTION>
SHARES PURCHASED(1) TOTAL CONSIDERATION
--------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders....... 3,066,848 69.4% $11,536,706 48.7% $3.76
New investors............... 1,350,000 30.6 12,150,000 51.3 9.00
--------- ------- ----------- -------
Total............. 4,416,848 100.0% $23,686,706 100.0%
======== ===== ========== =====
</TABLE>
- ---------------
(1) The computations in the tables set forth above (i) give effect to conversion
of all Series A Preferred Stock into 1,169,935 shares of Common Stock and
(ii) exclude 1,546,421 shares of Common Stock, with a weighted average
exercise price of $7.26, reserved for issuance upon exercise of stock
options granted pursuant to the Company's stock option plans and 26,000
shares of Common Stock reserved for issuance upon exercise of outstanding
warrants to purchase Common Stock at an exercise price of $6.15. See
"Description of Capital Stock."
12
<PAGE> 14
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
27, 1997 and as adjusted to reflect (i) the issuance and sale by the Company of
the 1,350,000 shares of Common Stock offered hereby, at an assumed initial
public offering price of $9.00 per share, and the application of the estimated
net proceeds received by the Company therefrom as described under "Use of
Proceeds" and (ii) conversion of all outstanding shares of Series A Preferred
Stock into 1,169,935 shares of Common Stock in connection with the Offering.
This table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements, including the notes thereto, included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
JUNE 27, 1997
---------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Current maturities of long-term debt..................................... $ 911 $ --
======= =========
Long-term debt, less current maturities.................................. $ 3,049 $ --
------- -----------
Shareholders' equity:
Series A Preferred Stock, no par value, 1,125,000 shares authorized,
1,125,000 shares issued and outstanding, actual; none authorized or
outstanding, as adjusted............................................ 4,480 --
Preferred Stock, no par value, 3,875,000 authorized; none outstanding,
actual; 10,000,000 shares authorized and none outstanding, as
adjusted............................................................ -- --
Common Stock, no par value, 10,000,000 shares authorized; 1,896,913
shares issued and outstanding, actual; 100,000,000 shares authorized
and 4,416,848 issued and outstanding, as adjusted(1)................ 7,056 22,136
Accumulated deficit.................................................... (3,864) (3,864)
------- -----------
Total shareholders' equity..................................... 7,672 18,272
------- -----------
Total capitalization...................................... $10,721 $18,272
======= =========
</TABLE>
- ---------------
(1) Excludes (i) 1,546,421 shares of Common Stock, with a weighted average
exercise price of $7.26 per share, reserved for issuance upon the exercise
of stock options granted pursuant to the Company's stock option plans, and
(ii) 26,000 shares of Common Stock reserved for issuance upon exercise of
outstanding warrants to purchase Common Stock at an exercise price of $6.15.
See "Description of Capital Stock."
13
<PAGE> 15
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND SELECTED OPERATING DATA)
The selected consolidated financial data of the Company for each of the
five years ended January 1, 1993 (fiscal 1992), December 31, 1993, December 30,
1994, December 29, 1995 and December 27, 1996 are derived from the audited
consolidated financial statements of the Company. The selected consolidated
financial and operating data of the Company for the six months ended June 28,
1996, and June 27, 1997, is derived from unaudited financial statements which,
in the opinion of management, include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the financial
condition and the results of operations. Operating results for the six months
ended June 27, 1997, are not indicative of results for the full year. The
following data should be read in conjunction with "Management's Discussion and
Analysis of the Financial Condition and Results of Operations" and the
consolidated financial statements, including the notes thereto, included in this
Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED(1) SIX MONTHS ENDED
----------------------------------------------------------------------- -------------------
JANUARY 1, DECEMBER 31, DECEMBER 30, DECEMBER 29, DECEMBER 27, JUNE 28, JUNE 27,
1993 1993 1994 1995 1996 1996 1997
----------- ------------ ------------ ------------ ------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenue........................... $10,666 $ 16,967 $ 24,513 $ 36,920 $ 62,926 $ 30,079 $ 36,381
Operating expenses................ 8,899 14,458 21,092 32,708 55,589 26,479 32,028
Selling, general and
administrative expenses......... 2,998 3,344 2,958 3,525 4,659 2,363 2,785
Depreciation and amortization..... 187 239 387 520 758 381 397
----------- ------------ ------------ ------------ ------------ -------- --------
Operating income (loss)........... (1,418) (1,074) 76 167 1,920 856 1,171
Interest expense, net............. (83) (9) 50 86 343 194 125
----------- ------------ ------------ ------------ ------------ -------- --------
Income (loss) before income
taxes........................... (1,335) (1,065) 26 81 1,577 662 1,046
Income tax (benefit) expense...... -- -- -- (460) (1,159) 26 500
----------- ------------ ------------ ------------ ------------ -------- --------
Net income (loss)................. $(1,335) $ (1,065) $ 26 $ 541 $ 2,736 $ 636 $ 546
========= ========== ========== ========== ========== ======= =======
Net income (loss) per
share(2)(3)..................... $ (0.91) $ (0.71) $ 0.01 $ 0.19 $ 0.75 $ 0.20 $ 0.17
========= ========== ========== ========== ========== ======= =======
Weighted average number of common
and common equivalent shares
outstanding(2).................. 1,482 1,494 2,702 3,398 4,102 4,082 4,072
SELECTED OPERATING DATA(1)(4):
Family Center clients(5).......... 21 29 41 58 65 59 65
Family Centers(6)................. 24 33 48 75 85 81 87
Program capacity(7)............... 2,997 3,850 5,295 9,113 10,702 10,178 11,278
</TABLE>
<TABLE>
<CAPTION>
AS OF
-------------------------------------------------------------------------------------
JANUARY 1, DECEMBER 31, DECEMBER 30, DECEMBER 29, DECEMBER 27, JUNE 27,
1993 1993 1994 1995 1996 1997
----------- ------------ ------------ ------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................... $ 2,086 $ 998 $ 939 $ 407 $ 1,769 $ 2,531
Total assets.............................. 4,589 4,774 5,265 17,055 20,378 19,391
Long-term debt, including current
maturities.............................. 245 758 883 5,064 4,416 3,960
Shareholders' equity...................... 2,977 2,067 1,724 4,015 6,976 7,672
</TABLE>
- ---------------
(1) The Company's fiscal year ends on the Friday closest to December 31. In
October 1995, the Company acquired all of the outstanding capital stock of
RCCM, an operator of 21 employer-sponsored child care centers. The
transaction was accounted for as a purchase, and consideration paid
consisted of $3.4 million in cash and 324,995 shares of Common Stock.
(2) Net income per share is computed by dividing net income by the weighted
average number of common and common equivalent shares outstanding during the
year, which includes additional dilution related to conversion of
outstanding preferred stock, stock options and warrants as computed under
the modified treasury stock method. The additional dilution related to stock
options granted within the last twelve months has been computed using the
treasury stock method and has been included in common equivalent shares
outstanding for all periods presented. For additional information concerning
the Company's historical share and per share information, see the Company's
consolidated financial statements and note 8 thereto.
(3) Supplemental pro forma net income per share of $0.71 for the year ending
December 27, 1996 and of $0.17 for the six months ended June 27, 1997 was
computed by adjusting the historical net income per share as reflected above
for the reduction in interest expense and after giving effect to the
estimated number of shares that would be required to be sold (at an assumed
initial public offering price of $9.00 per share) to repay $4.4 million and
$4.0 million in debt at December 27, 1996 and June 27, 1997, respectively.
(4) Selected operating data is as of the end of the periods presented.
(5) A Family Center client is defined as an entity that as of the applicable
date was under contract with the Company for the management of one or more
open and operating Family Centers.
(6) Family Centers are defined as the facilities which the Company is engaged to
manage and operate on behalf of its Family Center clients.
(7) Program capacity is defined as the maximum aggregate number of individuals
that the Company will enroll in the services and programs at its Family
Centers to be in compliance with NAEYC standards. As of each of the
respective dates, the state licensed capacity was 4,416, 5,279, 6,361,
10,487, 12,440, 11,902 and 13,122 individuals, respectively.
14
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion includes certain forward-looking statements.
Prospective investors are cautioned that all forward-looking statements involve
risks and uncertainties, including without limitation, those discussed in "Risk
Factors." Although the Company believes that the assumptions underlying the
forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate, and therefore, there can be no assurances that
the forward-looking statements included in this Prospectus will prove to be
accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by the Company that the objectives
and plans of the Company will be achieved. The following discussion and analysis
should be read in conjunction with, and is qualified in its entirety by, the
consolidated financial statements, including the notes thereto, and selected
consolidated financial data included elsewhere in this Prospectus. Historical
results are not necessarily indicative of trends in operating results for any
future period.
OVERVIEW
The Company is a leading national provider of a broad range of work and
consulting services for employers seeking to create a "family friendly" work
environment by providing their employees with workplace child care, education
and other family support programs. The Company manages corporate-sponsored
Family Centers, built and equipped by an employer at or near its offices,
providing high quality services such as early childhood education, child care,
back-up child care, kindergartens, get-well care, summer camps, and parent
support services. The Company currently manages 87 Family Centers for 65
corporate clients in 27 states and has 17 centers under development, including
centers for nine new corporate clients. Eleven of the Company's corporate
clients operate multiple Family Centers. In addition, the Company provides
work/life consulting services to help employers realize the benefits of work and
family programs and policies and to align work/life concerns of working families
with business strategies of employers. Consulting services provided by the
Company include feasibility studies, work/life strategic planning, return on
investment analyses and development of work/life programs and policies. During
1996, the Company provided consulting services to 25 corporate clients. The
Company expects its future growth will be generated from (i) developing new
corporate clients, (ii) managing additional Family Centers for existing clients,
(iii) providing additional work and family services and programs for existing
clients, (iv) expanding its work/life consulting services and (v) pursuing
strategic acquisitions.
The Company's revenue is derived from (i) the operation of Family Centers
and (ii) consulting services. Revenue from Family Centers consists of parent
fees for tuition, amounts paid by corporate clients to fund a portion of the
operating costs of a Family Center ("Client Operating Financial Support") and
management fees from clients. Parent fees represent the largest portion of the
Company's revenue, are generally comparable to prevailing market rates for
similar services offered by companies operating under National Association for
the Education of Young Children ("NAEYC") guidelines in the local market and are
paid weekly or monthly in advance. Management fees are generally a fixed monthly
fee or a per diem, per child fee. Client Operating Financial Support and
management fees are paid monthly. Separate from Family Center revenue, the
Company generates revenue from consulting services, which are typically
fixed-fee based, are generated from specific engagements or monthly retainers
and are recognized as services are performed. In 1996, no single client
accounted for more than 10% of the Company's revenue.
Operating expenses consist of direct expenses associated with the operation
of Family Centers and with delivery of consulting services. Family Center
operating expenses consist primarily of (i) staff salaries, taxes and benefits;
(ii) food costs; and (iii) program supplies and materials. Staff salaries, taxes
and benefits generally comprise 80% to 90% of Family Center operating expenses.
Consulting operating expenses are comprised primarily of (i) staff salaries,
taxes and benefits; (ii) contract labor; and (iii) other direct operating
expenses. Selling, general and administrative expenses are comprised primarily
of (i) salaries, taxes and benefits for non-center personnel, including
corporate, regional and business development personnel; (ii) accounting and
legal fees; (iii) insurance; and (iv) general corporate expenses. Depreciation
and
15
<PAGE> 17
amortization expense consists of the depreciation of three Company-owned Family
Center facilities, the personalty owned by the Company and amortization of
goodwill primarily related to the acquisition of RCCM.
The Company's Family Center contracts are typically three to five years in
length, with automatic annual renewals. The Company operates Family Centers
under three contract models: (i) cost-plus contracts; (ii) partnership
contracts; and (iii) profit/loss contracts. Under each contract model, clients
typically finance the facility and equipment, provide for ongoing facility
expenses and reimburse the Company for center personnel expenses incurred prior
to the center opening date. Parent fees are collected under each contract model
and vary in amount depending, among other things, on the level of Client
Operating Financial Support of a Family Center and the services provided.
Cost-Plus Contract. Under a cost-plus contract, revenue from
employers typically consists of: (a) Client Operating Financial
Support paid to the Company for reimbursement of any of a Family
Center's operating expenses and allocated corporate overhead that are
in excess of parent fees and (b) management fees. The cost-plus
contract model provides that all operating costs of a Family Center
including, initial operating losses during the enrollment building
period (typically during the 12 months following the opening of a
Family Center) are paid from parent fees and Client Operating
Financial Support. As of December 27, 1996, 40 of the Company's 85
Family Centers were operated under cost-plus contracts, generating 53%
of Family Center revenue.
Partnership Contract. Under a partnership contract, revenue from
employers typically consists of: (a) a fixed amount of Client
Operating Financial Support and (b) management fees. To the extent
that the parent fees and Client Operating Financial Support do not
cover the Family Center operating expenses, the Company is responsible
for such excess expenses. To the extent that parent fees and Client
Operating Financial Support exceed operating expenses of a Family
Center and an allocated portion of the Company's overhead, the
difference is generally reimbursed to the employer. In addition,
Client Operating Financial Support often includes payments to cover
initial operating losses during the enrollment building period. As of
December 27, 1996, 32 of the Company's Family Centers were operated
under partnership contracts, generating 31% of Family Center revenue.
Profit/Loss Contract. Under a profit/loss contract, revenue is
generated primarily from parent fees, and the Company may receive
limited Client Operating Financial Support. The Company does not
receive a management fee and bears profit and loss responsibility for
the operations of the Family Center. These contracts are subject to a
greater degree of variability in operating results than the other
contract types. Initial operating losses during the enrollment
building period are generally funded by the Company. Initial operating
losses may range from $50,000 to $125,000 per center. As of December
27, 1996, 13 of the Company's Family Centers were operated under
profit/loss contracts, generating 16% of its Family Center revenue.
The Company believes its operating model, which requires limited or no
capital investment for facilities and pre-opening expenses and provides three
contract structures to meet the varying needs of its clients, reduces Family
Center operating variability and risk. The mix of contracts has not varied
substantially over the past several years.
The Company measures profitability at the client level based on the
combined results of Family Center operations and consulting services from a
client. The Company's Family Center profitability (the "Operating Contribution")
is defined as Family Center revenue, including management fees, less Family
Center operating expenses prior to allocated corporate overhead. During the
first two years of operation, a Family Center generates varying degrees of
Operating Contribution, depending upon the contract model. During 1996, the
Company's 61 mature Family Centers (defined as those open as of December 30,
1994 and remaining open as of December 27, 1996) averaged approximately $85,000
in Operating Contribution. An additional component of client profitability is
consulting revenue for services performed. In the latter half of 1996, the
Company expanded its consulting services which resulted in 31 consulting
engagements for 25 corporate clients. The consulting revenue and operating
margins generated from consulting engagements will vary significantly depending
upon the general complexity of the project and the resources the Company must
allocate to
16
<PAGE> 18
complete the engagement. Consulting engagements are quoted on a fixed-fee basis
per engagement. In general, the Company believes that the operating margin
generated from the consulting business will be greater than that attained from
its Family Center operations.
The Company anticipates a continuation of its current operations during the
remainder of 1997 and 1998. During the first six months of 1997, the Company
opened net two Family Centers. Of the 17 Family Centers currently under
development, six to eight Family Centers are anticipated to open during 1997
and, of the remaining centers, eight are anticipated to open in 1998. The actual
opening of a new center is subject to a number of conditions and factors,
including, among others, construction timing, employer needs and weather
conditions.
In October 1995, the Company acquired all of the outstanding capital stock
of RCCM, an operator of 21 employer-sponsored child care centers. The
consideration paid consisted of $3.4 million in cash and 324,995 shares of
Common Stock. The transaction was accounted for as a purchase and resulted in
$5.7 million of goodwill, which is being amortized over 18 years.
Concurrent with the Offering, the Company intends to remove the
restrictions, set forth in the restricted stock agreement, on 32,500 shares of
Common Stock held by the Company's Chief Financial Officer. As a result, the
Company will record a non-recurring, non-cash compensation charge of $264,500
(for which the Company will not realize a tax deduction) in the third quarter of
1997 (assuming an initial public offering price of $9.00 per share). See
"Management -- Executive Compensation and Other Information."
The Company reports its quarterly results in 13 week increments (two
four-week periods and one five-week period) instead of three calendar months.
The 1997 fiscal year will contain 53 weeks, and the fourth quarter of 1997 will
contain 14 weeks.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain financial
data for the Company expressed as a percentage of revenue.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
------------------------------------------ -------------------
DECEMBER 30, DECEMBER 29, DECEMBER 27, JUNE 28, JUNE 27,
1994 1995 1996 1996 1997
------------ ------------ ------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Operating expenses........................ 86.0 88.6 88.3 88.0 88.0
Selling, general and administrative
expenses................................ 12.1 9.5 7.4 7.9 7.7
Depreciation and amortization............. 1.6 1.4 1.2 1.3 1.1
------ ------ ------ -------- --------
Operating income.......................... 0.3 0.5 3.1 2.8 3.2
Interest expense, net..................... 0.2 0.2 0.6 0.6 0.3
------ ------ ------ -------- --------
Income (loss) before income taxes......... 0.1 0.3 2.5 2.2 2.9
Income tax expense (benefit).............. - (1.2) (1.8) 0.1 1.4
------ ------ ------ -------- --------
Net income................................ 0.1% 1.5% 4.3% 2.1% 1.5%
========== ========== ========== ====== ======
</TABLE>
SIX MONTHS ENDED JUNE 27, 1997 COMPARED TO SIX MONTHS ENDED JUNE 28, 1996
Revenue. Revenue increased $6.3 million, or 21.0%, to $36.4 million for
the six months ended June 27, 1997 from $30.1 million for the six months ended
June 28, 1996. The operation of a net 12 new centers opened since the beginning
of 1996 generated $3.2 million of the increase in revenue and internal growth at
mature centers resulted in a $2.7 million increase in revenue. Consulting
revenue increased to $441,000 for the first six months of 1997 from $132,000
from the comparable period of 1996. The increase in consulting revenue resulted
from the Company's expansion of its consulting capabilities during the latter
half of 1996.
17
<PAGE> 19
Operating Expenses. Operating expenses increased $5.5 million, or 21.0%,
to $32.0 million for the first six months of 1997 from $26.5 million for the
first six months of 1996. Operating expenses as a percentage of revenue remained
unchanged at 88.0% for the first six months of 1997.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $422,000, or 17.8%, to $2.8 million for the
six month period ended June 27, 1997 from $2.4 million for the six month period
ended June 28, 1996. Selling, general and administrative expenses as a
percentage of revenue decreased to 7.7% in the first six months of 1997 as
compared with 7.9% for the comparable period in 1996. This decrease is
attributable to economies of scale as a result of a larger revenue base. The
Company does not anticipate that future declines in selling, general and
administrative expenses as a percentage of revenues, if any, will be comparable
to declines experienced in prior periods.
Depreciation and Amortization. Depreciation and amortization expense
increased $16,000 to $397,000 for the six month period ended June 27, 1997 from
$381,000 for the comparable period in 1996.
Operating Income. Operating income increased $315,000, or 36.7%, to $1.2
million for the first six months of 1997 from $856,000 for the first six months
of 1996. Operating income as a percentage of revenue increased to 3.2% in the
first six month period of 1997 from 2.8% for the comparable period in 1996.
Net Interest Expense. Net interest expense decreased $69,000 to $125,000
for the six month period ended June 27, 1997, from $194,000 for the six month
period ended June 28, 1996. This decrease is primarily the result of the
reduction of borrowings outstanding in the first half of 1997 compared with the
same period in 1996.
Income Taxes. The provision for income taxes was $500,000 for the six
month period ended June 27, 1997 as compared to $26,000 for the comparable
period of 1996. The Company did not incur any federal income tax expense during
the six month period ended June 28, 1996 as a result of a reduction of valuation
allowances in order to utilize net operating loss carryforwards. The Company's
effective tax rate for the six month period ended June 27, 1997 was 47.8% due to
amortization of approximately $200,000 of goodwill which is not tax-deductible.
YEAR ENDED DECEMBER 27, 1996 COMPARED TO YEAR ENDED DECEMBER 29, 1995
Revenue. Revenue increased $26.0 million, or 70.5%, to $62.9 million in
1996 from $36.9 million in 1995. The revenue increase was primarily the result
of (i) $19.6 million in revenue generated by RCCM in 1996 compared to $4.3
million in revenue from October 1995, (ii) internal growth generated at mature
centers, (iii) a full year of operation at centers opened in 1995, and (iv) the
operation of net ten new centers in 1996. In 1996, the Company opened 12 new
centers for nine clients and closed two centers. Consulting revenue increased to
$415,000 in 1996 from $86,000 in 1995. The increase in consulting revenue
resulted from the Company's expansion of its consulting capabilities during the
latter half of 1996.
Operating Expenses. Operating expenses increased $22.9 million, or 70.0%,
to $55.6 million in 1996 from $32.7 million in 1995. Operating expenses as a
percentage of revenue declined to 88.3% in 1996 from 88.6% in 1995. Operating
expenses in 1995 were impacted by expenses of $512,000 incurred in the operation
and closing of a neighborhood child care center that the Company acquired as a
part of an acquisition in 1993. This impact was offset in part by the 1996
operating expenses reflecting a full year of operations associated with the
Family Centers acquired in the RCCM acquisition. In general, RCCM Family Centers
had a greater proportion of cost-plus contracts which had typically operated
with higher operating expense levels.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1.2 million, or 34.3%, to $4.7 million in
1996 from $3.5 million in 1995. Selling, general and administrative expenses as
a percentage of total revenue decreased to 7.4% in 1996 from 9.5% in 1995. This
reduction resulted primarily from the economies of scale achieved in connection
with the 21 Family Centers acquired in the RCCM acquisition, as well as the
operation of net ten new centers in 1996. The Company does not anticipate that
future declines in selling, general and administrative expenses as a percentage
of revenues, if any, will be comparable to declines experienced in prior
periods.
18
<PAGE> 20
Depreciation and Amortization. Depreciation and amortization expense
increased $238,000, or 45.8%, to $758,000 in 1996 from $520,000 in 1995.
Amortization expense increased to $419,000 in 1996 from $270,000 in 1995. This
increase is attributable to a full year of amortization of the goodwill
associated with the RCCM acquisition. Depreciation expense increased to $340,000
in 1996 from $250,000 in 1995, and is attributable to a full year of
depreciation on two Family Center properties acquired in the RCCM acquisition.
Operating Income. Operating income increased to $1.9 million in 1996 from
$167,000 in 1995 and increased as a percent of revenue from 0.5% in 1995 to 3.1%
in 1996.
Net Interest Expense. Net interest expense increased to $343,000 in 1996
from $86,000 in 1995. The increase is a result of increased borrowings related
primarily to the acquisition of RCCM in October 1995.
Income Taxes. In 1996 the Company received an income tax benefit of $1.2
million as a result of a reduction in the valuation allowance relative to
deferred tax assets. In 1995 the Company recorded an income tax benefit of
$460,000.
YEAR ENDED DECEMBER 29, 1995 COMPARED TO YEAR ENDED DECEMBER 30, 1994
Revenue. Revenue increased $12.4 million, or 50.6%, to $36.9 million in
1995 from $24.5 million in 1994. The revenue increase was primarily the result
of (i) the acquisition of RCCM effective October 2, 1995; (ii) growth in mature
centers and centers opened in 1994; and (iii) the operation of a net six new
centers opened in 1995. In 1995, the Company opened seven new centers and closed
one neighborhood child care center that the Company acquired as part of an
acquisition in 1993.
Operating Expenses. Operating expenses increased $11.6 million, or 55.0%,
to $32.7 million in 1995 from $21.1 million in 1994. Operating expenses as a
percentage of total revenue increased to 88.6% in 1995 from 86.0% in 1994. This
increase primarily resulted from expenses of $512,000 incurred in the operation
and the closing of a neighborhood child care center that the Company acquired as
part of an acquisition in 1993 and higher operating expenses associated with the
Family Centers acquired in the RCCM transaction.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $567,000, or 18.9%, to $3.5 million in 1995
from $3.0 million in 1994. Selling, general and administrative expense as a
percentage of revenue decreased to 9.5% in 1995 from 12.1% in 1994. This
decrease was attributable to more efficient utilization of operational and
financial personnel and systems resulting from the increase in the number of
Family Centers under management.
Depreciation and Amortization. Depreciation and amortization expense
increased $133,000, or 34.4%, to $520,000 in 1995 from $387,000 in 1994.
Amortization expense increased to $270,000 in 1995 from $185,000 in 1994. This
increase was primarily the result of the RCCM acquisition. Depreciation expense
increased to $250,000 in 1995 from $202,000 in 1994. This increase is
attributable to the additional depreciation expense in the fourth quarter on the
two Family Center properties acquired in the RCCM acquisition.
Operating Income. Operating income increased to $167,000 in 1995 from
$76,000 in 1994.
Net Interest Expense. Net interest expense increased to $86,000 in 1995
from $50,000 in 1994. The increase was the result of increased indebtedness to
finance the RCCM acquisition in October 1995.
Income Taxes. In 1995 the Company recorded an income tax benefit of
$460,000 as a result of a reduction in the valuation allowance relative to
certain deferred tax assets.
19
<PAGE> 21
UNAUDITED SELECTED QUARTERLY OPERATING RESULTS
The following table sets forth certain unaudited quarterly operating
information for the ten quarters ended June 27, 1997. This data has been
prepared on the same basis as the audited consolidated financial statements
contained elsewhere herein and includes all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of this
information for the periods presented, when read in conjunction with the
Company's consolidated financial statements and notes thereto contained
elsewhere herein. The operating results for any previous quarter are not
necessarily indicative of results of any future period.
<TABLE>
<CAPTION>
1995 1996 1997
--------------------------------------- ----------------------------------------- -------------------
1ST 2ND 3RD 4TH 1ST 2ND 3RD 4TH 1ST 2ND
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue............... $6,828 $7,224 $10,185 $12,683 $14,435 $15,644 $15,984 $16,863 $17,480 $18,901
Operating income
(loss).............. 63 83 69 (48) 417 439 418 646 522 648
Income (loss) before
taxes............... 55 90 80 (145) 285 378 340 574 450 595
Income tax expense
(benefit)(1)........ 1 4 5 (471) 7 20 22 (1,208) 221 279
Net income............ 54 86 75 326 278 358 318 1,782 229 316
</TABLE>
- ---------------
(1) The income tax benefit in the fourth quarter of 1995 resulted from a
reduction in valuation allowance due to management's determination that the
Company's deferred tax assets other than operating losses will likely be
realized. In the fourth quarter of 1996, management determined that the
Company's net operating loss carryforwards will likely be realized and,
therefore, the remaining valuation allowance was removed.
The Company's revenue and results of operations fluctuate with the seasonal
demands for child care. The Company's revenue typically declines during the
third quarter as a result of decreased enrollments in its Family Centers as
parents withdraw their older children for entry into elementary schools. Since a
portion of the Company's costs are fixed costs, the Company's results are
affected by fluctuation in center and program utilization. Quarterly results of
operations may also fluctuate based upon the number and timing of center
openings and/or acquisitions, the performance of new and existing centers, the
contractual arrangements under which centers are operated, the change in the mix
of such contractual arrangements, the timing and level of consulting and
development fees, center closings, competitive factors and general economic
conditions. In addition, (i) the acquisition of RCCM in October 1995 and (ii)
the closing of the neighborhood child care center in the fourth quarter of 1995
significantly impacted the Company's operating results for that quarter. The
effects of seasonality have historically been obscured by the Company's growth.
The Company anticipates that these seasonal trends will continue in the future.
LIQUIDITY AND CAPITAL RESOURCES
The Company has primarily provided its services under management contracts
which require little or no capital investment by the Company for growth of its
operations. Corporate clients typically assume financial responsibility for
construction costs and ongoing facility expenses. Since inception, the Company
has financed its operating needs and acquisitions from investments from
shareholders, funded debt and cashflow from operations.
The Company had working capital of $2.5 million and $1.8 million as of June
27, 1997 and December 27, 1996, respectively, as compared to $1.3 million and
$407,000 as of June 28, 1996 and December 29, 1995, respectively. During 1996,
net cash provided by operating activities was $2.0 million as compared to
$770,000 in 1995. The increase in cash generated by operating activities is a
result of the increase in income before income taxes. During the six months
ended June 27, 1997, net cash provided by operating activities was $338,000 as
compared with $1.5 million for the comparable period in 1996. The decrease in
cash provided by operating activities was primarily the result of a decrease in
accounts payable and accrued expenses. Cash used in investing activities in 1996
totaled $169,000, compared to $4.2 million in 1995. The cash used in investing
activities in 1996 was primarily for furniture and equipment. Cash used in
investing activities in 1995 primarily consisted of the $3.6 million paid as
consideration for RCCM and related costs and $514,000 for purchase of property
and equipment. Cash used in financing activities in 1996 was $551,000 compared
to cash provided from financing activities of $3.1 million in 1995. The 1996
primary use of cash was for repayment of
20
<PAGE> 22
indebtedness while cash provided from financing activities in 1995 was primarily
from the debt financing of the RCCM acquisition.
The Company has received a commitment for a $5.0 million revolving credit
facility to be completed in connection with the closing of this Offering to be
used for working capital and other general corporate purposes. Borrowing under
the new credit facility will bear interest at LIBOR. The new credit facility
will be subject to renewal on an annual basis.
The Company believes that funds provided by operations, available borrowing
under the credit facility and the net proceeds from the Offering will be
sufficient to meet its needs for working capital and capital expenditures and
the Company's anticipated needs to fund future growth through the end of 1998.
The Company does not anticipate material capital expenditures during 1997 or
1998. An element of the Company's growth strategy is to pursue strategic
acquisitions. The Company may be required to seek external financing sources to
pursue such acquisitions. There can be no assurance that the Company would be
able to obtain such financing on reasonable or attractive terms, if at all.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of." This
statement imposes criteria for evaluating the recoverability of long-term assets
at each balance sheet date. The Company adopted SFAS No. 121 effective January
1, 1996. Such adoption did not have a material impact on the results of
operations, financial condition or cash flows of the Company.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." This statement requires new disclosures in the notes to the
financial statements about stock-based compensation plans based on the fair
value of the equity instruments granted. Companies also may base the recognition
of compensation cost for instruments issued under stock-based compensation plans
on these fair values. The Company adopted the disclosure provisions of SFAS No.
123 effective January 1, 1996, but currently does not plan to change the method
of accounting for these plans.
SFAS No. 128, "Earnings per Share" has been issued effective for years
ending after December 15, 1997. This statement establishes standards for
computing and presenting earnings per share. The Company is required to adopt
the provisions of SFAS No. 128 in the fourth quarter of 1997 and does not expect
adoption thereof to have a material effect on the Company's financial position
or results of operations; however, the effect on net income per share is
disclosed in the financial statements set forth herein.
SFAS No. 129, "Disclosure of Information About Capital Structure" has been
issued effective for years ending after December 15, 1997. This statement
establishes standards for disclosing information about an entity's capital
structure. The Company will be required to adopt the provisions of SFAS No. 129
in the fourth quarter of 1997 and does not expect adoption thereof to have a
material impact on the Company's financial position, results of operations or
cash flows.
21
<PAGE> 23
BUSINESS
OVERVIEW
The Company is a leading national provider of a broad range of management
and consulting services for employers seeking to create a "family friendly" work
environment by providing their employees with workplace child care, education
and other family support programs. The Company manages corporate-sponsored
Family Centers, built and equipped by an employer at or near its offices,
providing high quality services such as early childhood education, child care,
back-up child care, kindergartens, get-well care, summer camps, and parent
support services. The Company currently manages 87 Family Centers for 65
corporate clients in 27 states and has 17 centers under development, including
centers for nine new corporate clients. Eleven of the Company's corporate
clients operate multiple Family Centers. In addition, the Company provides
work/life consulting services to help employers realize the benefits of work and
family programs and policies and to align work/life concerns of working families
with business strategies of employers. Consulting services provided by the
Company include feasibility studies, work/life strategic planning, return on
investment analyses and development of work/life programs and policies. During
1996, the Company provided consulting services to 25 corporate clients. The
Company's clients include many of America's best known corporations, such as
AlliedSignal Inc., Barnett Banks, Inc., The Boeing Company, Campbell Soup
Company, The Chase Manhattan Corporation, Citicorp, Columbia/HCA Healthcare
Corporation, Eli Lilly and Company, J.C. Penney Company, Inc., Johnson &
Johnson, Marriott International, Inc., MBNA Corporation, Merck & Co., Inc.,
NationsBank Corporation, Owens Corning, S.C. Johnson & Son, Inc. and USAA.
MARKET OPPORTUNITY
The Company believes it is positioned to take advantage of two related
trends: (i) the changing profile of the work force, with more dual income
households and working parents, and the workplace and (ii) the recognition by
employers that responding to family needs of employees is an essential strategy
to attract, retain and motivate their employees. The resulting demand for work
and family services also reflects an increasing awareness by employers that
helping employees balance work and family responsibilities and creating a work
environment that facilitates that balance will increase productivity on the job.
The profile of the work force has changed dramatically as a result of an
increase in households where both parents are employed or, in households with
one parent, where the sole wage earner needs child care or other family
services. For example, (i) over 60% of mothers with children under the age of
six are currently employed or seeking employment, compared to 22% in 1960; (ii)
only 7% of all families currently conform to the perceived traditional family
consisting of the wage earning father, stay-at-home mother and one or more
children, down from 20% in 1969; and (iii) in 84% of all married couples, both
spouses work. As a result of the changing composition of the work force and
increasing pressures on employees to work harder and longer, parents are facing
additional difficulties in meeting the needs of their families. The Company
believes employers are increasingly recognizing that it is necessary to help
employees meet their family needs. The Hudson Institute's 1997 report "Workforce
2020," focusing on major trends expected to shape the work force through the
year 2020, concludes that American firms will need to continue to compete for
the best employees by offering an ever-expanding array of benefits and
accommodating a variety of lifestyle and workplace arrangements.
As a result of the increased competition for a limited number of qualified
employees, the Company believes large employers are becoming "family friendly"
in order to attract, retain, and motivate employees. The Mississippi Forum on
Children and Families reports that 40% of workers polled cited lack of available
child care as a barrier to employment and 28% said they had quit a job due to
lack of child care. The Child Care Action Campaign, a New York-based advocacy
group, reported that child care related absences cost employers approximately
$3.0 billion annually. Many of the Company's corporate clients have experienced
reduced absenteeism, improved productivity, enhanced recruitment and retention,
improved employee morale and an enhanced corporate image as a result of Family
Center services. Trends such as these have led to quantifiable benefits to
employers which further reinforce the strategy of offering family friendly
services at the workplace. For example, at Johnson and Johnson, a corporate
client of the Company with five Family Centers
22
<PAGE> 24
in operation and two under development, 86% of female employees who use or would
use Johnson and Johnson's work/family programs stated that those programs were
important to their decision to continue employment with Johnson & Johnson. At
AlliedSignal, Inc., the availability of the Family Center reduced absenteeism of
employees using the center by 89%. In addition, Chase Manhattan Corporation
calculated its Family Center providing back-up child care generated net savings
of approximately $800,000 over a one-year period, as a result of the reduced
absenteeism of employees using the program.
A significant portion of the Company's business involves providing child
care services. The child care market is a $30 billion industry segment with
diverse competition from both the public and private sectors. The market for
child care services remains highly fragmented with the 20 largest child care
providers, including the for profit and not-for-profit sectors, comprising less
than 5% of total child care revenues in the United States. The child care
industry is experiencing a shift toward center-based care as the percentage of
children under the age of five enrolled in such programs has increased from 13%
to 30% between 1977 and 1993. Investment by corporations in child care services
has grown in recent years and continues to grow. The Child Care Information
Exchange in 1996 reported that the employer-sponsored segment of the industry
comprised just 1% of the total child care market, but the employer-sponsored
segment grew by 25% in 1995, as compared with 5% growth in the industry as a
whole. In its 1996 survey of 1,050 major employers, Hewitt Associates identified
a 30% increase over the past five years in companies that provide some type of
child care service. The majority of employers, however, still provide no child
care support, and employers providing such services generally offer only limited
support. For example, in the Hewitt survey, only 9% of companies supporting
child care provided a workplace child care center. The Company believes that
child care assistance is becoming an important employee benefit which will lead
to further growth in the employer-sponsored segment and that employer-sponsors
and parents will seek association with high quality providers to provide
education and other services for their children.
CORPORATEFAMILY SOLUTIONS' APPROACH AND COMPETITIVE ADVANTAGE
The Company is a leading provider of work and family services solely
dedicated to the employer-sponsored segment of the market. The Company's
operations are geographically and customer diversified with 87 Family Centers
for 65 corporate clients located in 27 states. In addition, the Company
currently has 17 Family Centers under development for nine new corporate
clients. The Company believes that it is well positioned as a result of its
ability to (i) manage corporate relationships both on a local and national
level; (ii) provide high quality services and programs complying with national
accreditation standards; and (iii) deliver operational excellence through its
high caliber of Company employees and through offering innovative solutions to
employer and employee concerns. Satisfaction of clients and their employees is
closely monitored by executive management, and the Company believes its low
turnover rate among corporate clients is representative of the overall
operational excellence and satisfaction expressed by the Company's clients and
their employees. The Company believes it best distinguishes itself from its
various competitors by the following:
Strategic Focus on Corporate Clients. Since inception, the Company
has focused on establishing relationships with and providing work and
family services for corporate clients. The Company believes its focus on
corporate clients creates substantial opportunities for growth because (i)
the Company has developed expertise in operating in a corporate environment
and responding to the changing needs of the work force; (ii) the
convenience of a workplace-based center and the corporate client's
endorsement of the Company enhances its ability to market its services
directly to the corporate client employees; (iii) corporate sponsorship
provides greater financial resources to allow the Company to offer high
quality services and educational programs; and (iv) large employers require
high quality providers that have a proven track record of providing
services nationwide and in multiple locations. The Company's size and
diverse client base enhances its ability to manage a variety of corporate
needs from those of single site clients to multiple-site, multiple-service
clients. The Company seeks to differentiate itself from other providers of
work and family services by focusing on corporate clients, delivering
higher quality services, maintaining more highly qualified service
personnel and identifying and responding to client needs.
23
<PAGE> 25
High Quality Services. The Company operates all its child care
programs and Family Centers at standards to achieve accreditation set forth
by NAEYC, a national organization dedicated to improving the quality of
care and developmental education provided to young children. NAEYC
accreditation is a distinction earned by less than 10% of child care
programs in the country. The Company's operating model, which generally
requires that all facility, facility-related costs and management fees be
paid by the employer-sponsor, provides more financial resources available
at the Company's Family Centers than most other centers. These financial
resources directly translate into higher teacher compensation, lower
teacher-child ratios, enhanced curriculum and increased employee training
and development. Accordingly, such financial assistance enables the Family
Center to deliver higher quality services and programs resulting in
increased satisfaction for clients and their employees and an enhanced
learning environment for children.
Highly Qualified Personnel. The Company believes that the experience
and knowledge of its Center Directors, Executive Directors, Regional Vice
Presidents of Operations ("Regional Vice Presidents"), consulting
personnel, teachers and Advisory Board members are critical elements in its
ability to provide high-quality services, secure new corporate clients and
expand services and programs to existing clients. At the Family Center
level, operational performance is the immediate responsibility of the
Center Director. Center Directors average over 15 years of family service
and child care experience, including over eight years directing a child
care center, and approximately 98% and 44% of Center Directors have
received undergraduate and advanced degrees, respectively. Lead teachers
typically hold a four year degree or an associate degree and three plus
years of child care experience. Other teachers typically have several years
experience in the child care field or hold an associate degree in early
childhood education or are Child Development Associate credentialed. For
several clients with multiple sites, the Company employs an Executive
Director who is responsible for the coordination and consistency of the
various programs of a multicenter client around the country. The six
Regional Vice Presidents, who oversee the Center Directors, have an average
of 11 years of experience in managing multiple center operations and an
average of 12 years directing a child care center. The Company's consulting
services are provided by eight employees with an average of 13 years of
work/life services and consulting experience. Advising both the Family
Center and consulting personnel is an Advisory Board of 18 nationally
recognized leaders in education and/or early childhood development.
Responsiveness and Flexibility to Client Needs. The Company provides
a broad range of services and programs tailored to meet the changing needs
of each client and its work force. The Company develops and implements
child care, education and other family services to meet client and employee
needs beyond traditional child care programs. Specifically, the Company has
implemented summer camps, special event and conference care, extended
hours, weekend and 24-hour care for multiple shift work forces, family
resource services, back-up care, school-age programs, and kindergartens.
The Company believes it provides its Center Directors with corporate
support and significant autonomy which enables them to better meet the
objectives of each corporate client. In addition, the Company's three
contract models provide corporate clients flexibility in structuring their
financial commitment to work and family services. The Company's consulting
services provide clients the opportunity to better evaluate their needs and
review the effectiveness of programs already in place.
GROWTH STRATEGY
The Company's objective is to strengthen its position as one of the leading
providers of work and family services. To achieve this goal, the Company employs
the following key strategies:
Developing new corporate clients. The Company intends to develop new
corporate client relationships through aggressive sales and marketing of
its management and consulting services. Marketing efforts are designed to
focus potential clients on (i) the benefits to employers of utilizing work
and family services and (ii) the Company's high quality services and
programs. In general, the Company targets employers with more than 1,000
employees at a work site. In the first half of 1997, the Company increased
its sales and marketing personnel to expand market penetration and to
enhance its responsiveness to client requests and proposals. The Company
believes that its consulting division enhances its
24
<PAGE> 26
ability to educate employers on the benefits of implementing work and
family services and to establish relationships with new corporate clients.
Expanding existing corporate client relationships. The Company seeks
to (i) develop new Family Centers for existing corporate clients who have
multiple work sites, (ii) provide additional services and programs at
existing Family Centers, and (iii) provide consulting services to assist
clients in evaluating work/life policies and programs. The Company
currently manages multiple Family Centers for 11 clients that currently
have 33 Family Centers in operation and eight under development, including
Johnson & Johnson with five Family Centers in operation and two under
development; USAA with two Family Centers in operation and three under
development; Barnett Bank with five Family Centers in operation; Citicorp
with four Family Centers in operation and two under development; and MBNA
with four Family Centers in operation. The Company believes that its
existing client base provides expansion opportunities for additional Family
Centers and additional services and programs such as back-up care,
school-age programs and summer camps. Many of the Company's existing
clients have begun utilizing the Company's consulting services to help
evaluate the effectiveness of their work/life policies, and the Company
believes that its existing client base will continue to look to the Company
for an increasing array of consulting services.
Developing new services and products. The Company seeks to develop a
continuum of work and family services to meet the needs of corporate
clients and their employees. The Company's approach to relationship
management allows it to work with existing clients, employees and their
families to address needs as they arise and to develop new services or
programs designed to meet those needs. The Company has pilot programs for
new services under development or evaluation, including the management of
employer-sponsored elementary schools, tutoring and other education
services, elder care, and the distribution of educational books, toys,
games and software for family members of all ages.
Pursuing strategic acquisitions. The Company intends to pursue
acquisitions of related work and family service businesses in order to (i)
enter into new geographic markets, (ii) increase its presence in existing
markets and (iii) provide additional services and programs to respond to
client interests and the family needs of employees. The Company believes
that the work and family services industry is growing and fragmented and
that there are acquisition opportunities.
SERVICES
The Company works in conjunction with its clients and their employees to
respond to changing workplace needs and to help employees balance their work and
family responsibilities. A client relationship often begins with the Company
providing consulting services to an employer, and progresses to the planning,
development and management of a Family Center, where the Company provides
services to a client's employees at the workplace. These work and family
services are designed to (i) address employers' ever-changing workplace needs,
(ii) enhance employee productivity, (iii) improve recruitment and retention of
employees and (iv) improve the overall employee-employer-family relationship.
The Company emphasizes operational excellence, client service and program
leadership, and requires that each Family Center be operated at NAEYC standards.
Services include:
Family Centers. The Company currently operates 87 Family Centers for 65
corporate clients in 27 states and has 17 centers under development, including
centers for nine new corporate clients. The "Family Center" concept evolved from
the more traditional workplace child care center and is designed to serve a
broader segment of the work site population. In addition to providing services
for pre-school children, school-age children and elder dependents of employees,
the centers are designed to be able to address the broader lifestyle needs of
all employees. Each Family Center provides a number of services designed to meet
the business objectives of the corporate client and the family needs of the
client's employees. As a result, the physical facility, operating policies, and
services are tailored for each client. Services currently offered at the
Company's Family Centers include:
Early Childhood Education. The Company offers early childhood
education at each of its 87 Family Centers. The Company's proprietary
program for learning, entitled "The World at Their
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Fingertips," includes educational programs for infants, toddlers, and
preschoolers and creates developmentally appropriate experiences for every
child. "The World at Their Fingertips" includes many components designed to
promote physical, cognitive, emotional, and language development and
provides a developmentally appropriate educational curriculum enabling
teachers to provide individualized, personalized, responsive care and
affection for each child. The infant and toddler program provides a rich
environment for development with learning centers planned to maximize large
and small motor experiences, sensory and cognitive experiences, language,
music and personal experiences. The preschool program provides a
developmentally appropriate learning-centered curriculum, including
dramatic play, art expression, construction/blocks, computer and
music/movement. The Company's early childhood educational services meet or
exceed the standards established by the National Academy of Early Childhood
Programs ("NAECP"), a division of NAEYC.
Employer-Sponsored Child Care. The Company currently operates 82
child care programs in its Family Centers. At the end of 1996, the program
capacity at the Company's Family Centers exceeded 10,000 children.
Consistent, reliable child care is an essential service for working
families. Family Centers provide child care in many different ways,
including traditional day care, evening care when parents work late,
weekend care, 24-hour care for multiple shift work forces, special event
care, emergency care, school holiday care, as well as other services.
Summer Camps. The Company currently operates summer camps in
conjunction with 38 Family Centers and as a stand-alone service for one
corporate client. During 1996, the Company provided this service to
approximately 1,300 children. The camps include programs for children in
age-related groups from five to 12 years old. Programs include
age-appropriate enrichment activities such as science, computers,
gymnastics, dance, sports, and other activities, and include both on-site
and off-site day camps.
Back-Up Care Programs. The Company currently operates 34 back-up care
programs. Four centers exclusively offer back-up care programs, while other
back-up care programs are offered in designated rooms within a larger
Family Center. The Company has approximately 5,600 families registered to
use back-up care. Back-up care programs serve families whose primary child
care arrangements are unavailable because of emergencies, illness, or
caregiver turnover and provide care on school holidays and release days.
The Company's back-up care programs serve children from ages six weeks to
12 years. Family Centers that exclusively offer back-up care programs range
in size from 12 to 110 children and include the first such program ever
accredited by NAEYC.
Kindergartens. The Company currently operates 25 Family Center
kindergartens, all of which meet or exceed the standards set by NAECP.
During 1996, the Company's kindergarten programs served approximately 500
children. The kindergarten curriculum employs a comprehensive developmental
approach that challenges and prepares children for success in school and is
tailored to reflect the expectations of the surrounding school systems. The
Company has added kindergartens to certain of its Family Centers in
response to the demand from parents seeking to maintain the quality
learning environment that their children have experienced in Family
Centers.
School-age Programs. The Company currently operates 13 school-age
programs in Family Centers for children ages six to 12 years. During 1996,
the Company provided these services to approximately 500 children. These
programs may include before- and after-school care, tutorial services and
enrichment programs such as gymnastics, computer, or foreign language
instruction.
Get-Well Care. The Company currently offers get-well care in 13
Family Centers. These programs serve mildly ill children recovering from
various illnesses and injuries and are typically staffed with a registered
nurse or licensed practical nurse.
Parent Support. All Family Centers include support programs for
parents, including parent education programs, seminars, support groups and
resource libraries. Parent education programs include family resource rooms
(serving as a library for parents and a site for parent seminars),
scheduled family counseling, "lunch and learns," evening programs with
presentations and round table discussions on
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topics of concern to parents (such as child behavior and time management),
and first-aid and CPR training. Support services include meals-to-go,
laundry pick-up and carpooling coordination. The Company's parent support
services are developed and implemented with the involvement of a parent
advisory group established at each Family Center.
Consulting Services. The Company offers a comprehensive range of work/life
consulting services to help employers assess, plan and develop work and family
solutions, realize the benefits of work/life programs and policies and to align
work/life concerns with other strategic concerns of employers. Specific examples
of services provided by the Company include:
- Guidance, staffing and support for work and family initiatives,
including a company-wide work/life conference;
- Development of a strategic work/life plan for a national work force
based on a customized survey, focus groups and management
interviews;
- A feasibility study of the viability of worksite primary schools;
- Consultation on the integration of a client's work/life, diversity
and training efforts;
- A multisite study to identify dependent care needs and develop a
strategic plan to meet those needs; and
- A return on investment study to analyze the benefits of a client's
work/life investments.
The Company believes that its consulting and development services play an
integral role in its client services and allow it to strengthen existing and
develop new corporate relationships. During 1996, the Company provided
consulting services for 25 corporate clients, eight of which are clients for
which the Company operates one or more Family Centers.
OPERATIONS
General. The Company is organized into two integrated operating units
consisting of Family Center operations and consulting services. The Company's
management philosophy promotes a commitment to excellence for children, parents,
clients and staff. Corporate operations are coordinated from the Company's
headquarters located in Nashville, Tennessee. Corporate office functions include
Family Center operations oversight, human resources, marketing, business
development, facility design, finance, accounting, risk management, information
systems, and corporate communications.
Family Center Operations. Family Center operations are organized into six
operational regions, each managed by a Regional Vice President who reports to
the Company's Chief Operating Officer. Regional Vice Presidents and regional
support staff are responsible for Family Center development, direct management
oversight, quality control, financial performance, and client relations. Each
Family Center is managed by a Center Director. Each Family Center's size,
staffing, hours of operation and range of services provided vary according to
each corporate client's needs and desires. Family Centers range in size from
3,000 square feet to 47,000 square feet and enrollment capacity from 35 to 450.
Staffing for a Family Center typically consists of an administrative team, a
teaching staff and support personnel. Family Centers are typically located on a
corporate client's site, either in converted space, or free-standing structures
designed specifically for use as a Family Center. Currently, 73 centers are
located at client worksites and 14 are located on properties contiguous to the
worksite. The facilities are generally owned or leased by the corporate clients,
except for the three owned by the Company.
Consulting Services. The Company's consulting services are provided
through a division of the Company titled The Resource Group, which is based in
Morristown, New Jersey. The Resource Group provides consulting services to
corporate clients including feasibility studies, work/life strategic planning,
benchmark studies, policy and practice alignment, return on investment analysis
and community investment. In addition to consulting services, The Resource Group
supports the Company's Family Center programs, ensuring such programs remain
state of the art and of the highest quality, and conducts research and
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development of new services. The Resource Group is staffed by eight full-time
employees with additional contract consultants depending on the workload and
expertise needed to complete a particular project.
Training. The Company has developed a comprehensive training program for
its employees. Management training is provided on an ongoing basis to all Center
Directors and includes human resource management, risk management, budgeting,
customer service, and program implementation. Teacher training is conducted in
each Family Center and includes orientation and ongoing training including
training related to child development and education, health, safety and
emergency procedures. Training is conducted on a regular basis at each Family
Center and in company-wide meetings and is designed to meet NAEYC training
standards.
Health and Safety. The Company emphasizes the health and safety at each
Family Center. The Company maintains a variety of security measures at its
centers, which may include electronic security or access systems, sign-out
procedures for children and other site-specific measures. Safety features are
incorporated into the operation of the Family Centers, including selection of
safe and age-appropriate toys and play equipment, cushioned surfaces surrounding
play structures, rounded corners on furniture, child-size amenities and open and
windowed lay-outs providing increased visibility for teachers and parents. The
Company schedules emergency drills for fire safety and other emergencies, and
requires current CPR and first aid certification for center management
personnel.
Communication and Information Systems. The Company has an information,
communication and financial reporting system which links every Family Center to
the Company's regional and corporate offices. This system provides timely
financial information on such items as revenue, expenses, enrollments, payroll
and staff hours. The Company seeks to improve its operating efficiencies by
providing management with more timely information through its information
systems.
MARKETING
Management believes that the Company's broad-based operations in 27 states
with 87 Family Centers and the expertise and reputation of its management team
have created valuable and strong name recognition within the work and family
services industry. The Company's directors, senior officers and Advisory Board
members are involved at the national level with education, work/life and
children's services issues, and their prominence and involvement in such issues
plays a key role in attracting new clients and developing additional services
and products for existing clients.
The Company's marketing and sales efforts focus on (i) developing new
corporate client relationships, (ii) expanding existing relationships and (iii)
promoting and maintaining relationships with client employees and families.
Sales and marketing activities at the corporate level are led by the Company's
business development group, with assistance provided by executive officers,
Regional Vice Presidents, Center Directors, The Resource Group and support
personnel. The Company has four business development officers, including two
individuals who recently joined the Company. Development officers generally
cover distinct geographic territories within the continental United States.
The Company markets its services to prospective clients in a variety of
ways, including direct mail to qualified prospects, industry conferences, and
telephone and personal visits to interested potential clients. In addition,
clients often refer other employers to the Company. With existing clients, the
Company maintains regular contact through its business development personnel and
operations management and is committed to understanding the client's evolving
business circumstances and work force family needs. At each Family Center,
regional and center management are responsible for marketing to families and
staying abreast of new and changing needs for both the employer and employees.
This responsiveness and client involvement enable the Company to develop and
market additional services to existing clients as well as to new corporate
clients.
COMPETITION
Depending on the services provided, the Company competes with a variety of
companies in each segment of its operations. The Company's largest competitors
for employer-sponsored child care services include Bright
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Horizons Children's Centers, Inc. and, to a lesser extent, the
employer-sponsored child care divisions of other large child care companies,
such as Kindercare and Children's Discovery Centers. The Company believes that
it is distinguished from these competitors by its exclusive focus on corporate
clients and commitment to accreditation standards. The Company believes that it
is able to compete successfully by understanding and responding to the business
needs of prospective clients and by offering professionally developed programs,
highly qualified personnel, attention to risk management and a broad range of
services. The Company also faces competition for enrollment from a variety of
for-profit, not-for-profit and government-based providers.
The Company has a number of competitors for work/life consulting services
and center services complementary to its Family Centers. Many of such
competitors provide, among other services and products, work/life consulting
services, adult education and contract school services, and have greater
financial and operating resources than the Company. The Company believes that it
distinguishes itself from competitors by its presence at the workplace,
knowledge of family needs, and ability to integrate a number of services and
programs into a Family Center tailored to the needs of an employer.
The Company's ability to compete successfully for employer-sponsored work
and family services, developed in partnership with employers, depends on a
number of factors, including quality of service, cost-effective delivery of
services and ability to provide the scope of services necessary for an
employer's needs. With respect to child care services, there are many
center-based child care companies that compete for corporate relationships to
provide on-site family services, some of which have greater financial or other
resources that allow them to compete successfully against the Company. The
Company believes that its staff of trained professionals is well equipped to
develop a plan with a corporate client to best meet the work and family needs of
the employer's work force. Through participating in the development plan of the
Family Center, consulting with the contractor and employer, staffing the Family
Center to provide the scope and depth of services the employer and its employees
need and desire, and given the Company's experience with 65 employers managing
87 centers, the Company believes it is well positioned to provide services that
are family-friendly and improve the work environment for corporate employees,
thereby enhancing the overall productivity of the corporate client's operations.
Along with competition for corporate clients, each Family Center faces
competition for enrollment from a wide range of community-based child care
providers. The Company believes, however, that client employees perceive greater
value, convenience and flexibility associated with the Company's services.
REGULATION
The Company's child care operations are subject to a variety of federal,
state and local regulations and licensing requirements. The Company has policies
and procedures in place in order to comply with the regulations and
requirements. Although the regulations and requirements vary greatly from
jurisdiction to jurisdiction, governmental agencies generally review, among
other things, the center's safety, fitness and adequacy of buildings and
equipment, licensed capacity, the ratio of staff personnel to enrolled children,
staff training, dietary program, daily curriculum, recordkeeping, and compliance
with health and safety standards. In most jurisdictions, these agencies conduct
scheduled and unscheduled inspections of centers, and licenses must be renewed
periodically. In a few jurisdictions, new legislation or regulations have been
enacted or are being considered which establish requirements for employee
background checks or other clearance procedures for new employees of child care
centers. Failures by a center to comply with applicable regulations can subject
it to governmental sanctions, which might include fines, corrective orders,
being placed on probation or, in more serious cases, suspension or revocation of
the center's license to operate or an award of damages to private litigants, and
could require significant expenditures by the Company to bring the Company's
centers into compliance.
In addition, state and local licensing regulations often provide that the
license held by the Company may not be transferred. As a result, any transferee
of a family services business (primarily child care) must apply to any
applicable administrative bodies for new licenses. There can be no assurance
that the Company would not have to incur material expenditures to relicense
centers it may acquire in the future. The Company believes it is in substantial
compliance with all material regulations applicable to its business.
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EMPLOYEES
As of June 27, 1997, the Company employed approximately 2,550 full-time
employees, of whom 32 were employed at its corporate headquarters. Six employees
serve as Regional Vice Presidents, 87 as Center Directors, and approximately
2,500 as teachers and administrative personnel in the Family Centers. In
addition, at June 27, 1997, the Company had approximately 535 part-time
employees and 700 substitutes on its payroll. None of the Company's employees is
represented by a labor union, and the Company believes its relationship with its
employees is good.
LITIGATION
The Company has been named as a defendant in a lawsuit in which the
plaintiff is seeking compensatory and punitive damages for injuries allegedly
sustained at a Family Center in Florida. The case is in the preliminary stages
of discovery and pleading, and the Company intends to defend its position
vigorously. Based on its present understanding of the case and the advice of
counsel, management of the Company believes that the outcome of the case will
not have a material adverse effect on the Company's business, results of
operations or financial condition.
In addition to the litigation noted above, the Company is, from time to
time, subject to claims and suits arising in the ordinary course of its
business. Such claims have, in the past, generally been covered by insurance.
Management believes the resolution of the above noted litigation and other legal
matters will not have a material effect on the Company's financial condition or
results of operations, although no assurance can be given with respect to the
ultimate outcome of any such actions. Furthermore, there can be no assurance
that the Company's insurance will be adequate to cover all liabilities that may
arise out of claims brought against the Company.
INSURANCE
The Company's insurance program currently includes the following types of
policies: worker's compensation, commercial general liability, automobile
liability, commercial property liability, student accident coverage, employment
practices liability and excess "umbrella" liability including coverage for child
abuse and molestation. The policies provide for a variety of coverages, are
subject to various limits, include deductibles or self-insured retentions.
Management believes that the Company's current insurance coverages are adequate
to meet its needs. The Company has not experienced difficulty in obtaining
insurance coverage, but there can be no assurances that adequate insurance
coverage will be available in the future, or that the Company's current coverage
will protect it against all possible claims. There is no assurance that claims
in excess of, or not included within, the Company's insurance coverage will not
be asserted, the effect of which could have an adverse effect on the Company.
See "Risk Factors -- Adverse Publicity; Ability to Obtain and Maintain
Insurance."
TRADEMARKS
The Company has filed applications for registration of the following
trademarks and service marks with the United States Patent and Trademark Office:
Family Solutions(SM) and CorporateFamily Centers(SM). A registered
trademark/service mark in the United States may be effective indefinitely
subject only to a required supplemental filing every ten years and the continued
use of the mark by the registrant. A properly registered trademark/service mark
establishes the presumption of ownership of the trademark/service mark by the
registrant and constitutes constructive notice of such ownership.
PROPERTIES
The Company's executive offices are located in Nashville, Tennessee, and
consist of 7,105 square feet leased through July 30, 2000, with an option to
renew the lease for two additional five-year terms. In addition, the Company (i)
owns two child care facilities and (ii) leases certain real property for use at
four Family Centers. Three of the above-mentioned leases have agreements whereby
the client becomes contractually responsible for the lease obligation in the
event the Company no longer operates a Family Center for such client at the
location. The Company also leases other facilities at various locations, which
are not material to its business.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning the directors
and executive officers of the Company as of the date of this Prospectus.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------- --- -------------------------------------------------------------
<S> <C> <C>
Marguerite W.
Sallee(1).............. 51 President, Chief Executive Officer and Director
Robert D. Lurie.......... 51 Chairman of the Board, President of The Resource Group and
Director
David J. Gleason......... 51 Executive Vice President and Chief Operating Officer
Michael E. Hogrefe....... 37 Executive Vice President, Chief Financial Officer and
Secretary
Lamar Alexander(1)....... 57 Vice Chairman of the Board and Director
JoAnne Brandes(2)(3)..... 44 Director
Jerry L. Calhoun(1)(3)... 53 Director
Thomas G. Cigarran(2).... 55 Director
E. Townes Duncan(3)...... 44 Director
Joseph J. Guzzo(2)....... 57 Director
</TABLE>
- ---------------
(1) Member of the Nominating Committee
(2) Member of the Audit Committee
(3) Member of the Compensation Committee
Marguerite W. Sallee is a founder of the Company and has served as
President, Chief Executive Officer and a director since February 1987. Prior
thereto, Ms. Sallee served as Commissioner of Human Services in former Governor
Lamar Alexander's cabinet. Ms. Sallee received a Bachelor of Arts from Duke
University and a Master of Arts in Psychology from Austin Peay University. She
is a director of Proffitt's, Inc., an owner and operator of department stores;
MagneTek, Inc., a manufacturer of integrated electrical products; and Phoenix
Healthcare Corporation, a managed healthcare company; and is a former Chairman
of the Nashville Area Chamber of Commerce. In addition, Ms. Sallee is a delegate
to the Presidential Summit for Children.
Robert D. Lurie has served as Chairman of the Company since December 1995
and as President of The Resource Group, a division of the Company focused on
providing consulting and resource support to work/life center operations, since
October 1995. From 1984 to 1995, Mr. Lurie served as President and Chief
Executive Officer of RCCM, which was acquired by the Company in October 1995.
Mr. Lurie received his Bachelor of Arts degree from the University of Florida
and his Master of Arts in American Civilization from the University of Texas at
Austin. He completed his graduate studies in Administration and Social Policy at
the Harvard University Graduate School of Education.
David J. Gleason, Ph.D. has served as an Executive Vice President and Chief
Operating Officer of the Company since 1988. From 1986 until April 1988, Dr.
Gleason was Vice President of Support Services of Children's World Learning
Centers, a national child care corporation. Dr. Gleason served as Executive
Director of the National Child Development Associate Program in Washington, D.C.
He received a Bachelor's degree from St. Michael's College, a Master's degree in
Child Development from the University of Chicago and a Ph.D. in Human
Development Education from the University of Maryland. Dr. Gleason has served as
a member of the Advisory Committee of the National Academy of Early Childhood
Programs and the Commission for Center Accreditation for the National
Association for Education of Young Children and is currently a member of the
Board of Directors of the Alliance of Work/Life Professionals.
Michael E. Hogrefe has served as an Executive Vice President, Chief
Financial Officer and Secretary since January 1996. Mr. Hogrefe served as
Treasurer of Service Merchandise Company, Inc., a national retail chain of
catalog stores, from July 1993 through January 1996 and as Assistant Treasurer
from March 1990 to July 1993. Mr. Hogrefe received a Bachelor of Science in
Management from Drake University and a Master's in Business Administration from
New York University, Stern School of Business.
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Lamar Alexander is a founder of the Company and has served as Vice Chairman
of the Board of Directors since May 1996. He also serves the Company as Chairman
of the Nominating Committee of the Board of Directors. Mr. Alexander served as a
director of the Company from September 1987 to April 1991. Mr. Alexander
currently serves as Co-Director of Empower America, a conservative public policy
advocacy organization; Chairman of the National Commission of Philanthropy and
Civic Renewal; and Honorary Chairman of the Campaign for a New American Century,
a political action committee. From 1991 to 1993 he served as Secretary of the
United States Department of Education, from 1987 to 1990 he served as President
of the University of Tennessee, and from 1979 to 1987 he served as Governor of
Tennessee. Mr. Alexander also currently serves as a director of InterMedia
Partners, a national cable television partnership; The Learning Company, an
international educational software company; and as a director and Vice Chairman
of Processed Foods, Inc., a food manufacturing company.
JoAnne Brandes has served as a director of the Company since December 1995.
Ms. Brandes has served as Vice President and General Counsel for S.C. Johnson
Commercial Markets, Inc., a manufacturer and marketer of cleaning and sanitation
products and services, since October 1996. Prior to that time, Ms. Brandes
served as Vice President of Corporate Communication Worldwide for S.C. Johnson &
Son, Inc., a manufacturer of cleaning and personal care products, from October
1994 to September 1996 and served as Director of Corporate Communication
Worldwide from May 1992 to September 1994. Prior thereto, Ms. Brandes served as
Senior Legal Counsel to S.C. Johnson & Son, Inc. from 1981 to 1992. Ms. Brandes
serves as a director of Alternative Resources Corporation, a temporary technical
staffing company; a Regent in the University of Wisconsin System Board of
Regents; Director of Child Care Action Campaign, a not-for-profit child advocacy
group; and serves on the State of Wisconsin's Governor's Child Care Council.
Jerry L. Calhoun was elected as a director in April 1997. Mr. Calhoun
currently serves as Vice President of Employee and Union Relations for The
Boeing Company, an aeronautics design and manufacturing company, and has served
in such capacity since January 1997. Prior to that time, Mr. Calhoun served in
various capacities at The Boeing Company, including Vice President of Human
Resources from November 1994 to January 1997, Director of Business Resources
from November 1992 to November 1994 and Director of Human Resources from October
1990 to November 1992.
Thomas G. Cigarran has served as a director of the Company since November
1987 and currently serves as the Chairman of the Audit Committee of the Board of
Directors. Mr. Cigarran has been Chairman, President and Chief Executive Officer
of American Healthcorp, Inc., an operator of comprehensive hospital-based
diabetes treatment centers and a provider of diabetes disease management
services for third-party payors, since September 1988 and was President and
Chief Operating Officer from its founding in September 1981 until September
1988. In addition, Mr. Cigarran has served as Chairman of the Board and Chief
Executive Officer of AmSurg Corp., a developer, acquirer and manager of
practice-based ambulatory surgery centers, since 1992. Mr. Cigarran is a
director of ClinTrials Research Inc., a contract research organization providing
services to the pharmaceutical, biotechnology and medical device industries.
E. Townes Duncan has been a director of the Company since April 1988 and
currently serves as the Chairman of the Compensation Committee of the Board of
Directors. Mr. Duncan has served as the President of Solidus, LLC, a private
investment firm, since January 1997. Since November 1993, Mr. Duncan has served
as Chairman of the Board, Chief Executive Officer and a director of Comptronix
Corporation, a provider of electronics contract manufacturing services.
Comptronix Corporation filed a petition for Chapter 11 protection on August 9,
1996, completed the sale of substantially all of its assets in November 1996 and
consummated its plan of liquidation in June 1997. From 1985 to 1993, Mr. Duncan
was a Vice President and principal of Massey Burch Investment Group, Inc., a
venture capital corporation. Mr. Duncan is a director of J. Alexander's
Corporation, an owner and operator of restaurants, and Sirrom Capital
Corporation, a specialty finance company.
Joseph J. Guzzo has served as a director of the Company since November
1991. Mr. Guzzo is the President of International Operations for Marriott
Management Services Corp. Since joining Marriott Corporation in 1962, Mr. Guzzo
has served in a variety of management positions, including Vice President of
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<PAGE> 34
Finance & Administration for the Theme Park Group and Vice President and
Controller for Marriott Restaurant Operations. Mr. Guzzo is also Chairman of the
Board and a director of the Marriott Credit Union.
Under the terms of the Company's Amended and Restated Charter (the
"Charter"), the members of the Board of Directors are divided into three
classes, each of which serves a term of three years. Each class is to consist as
nearly as practicable of one-third of the total number of directors constituting
the Board of Directors. Marguerite W. Sallee and E. Townes Duncan comprise the
"Class I" Directors, and their current term expires in 2000. Lamar Alexander,
JoAnne Brandes and Joseph J. Guzzo are the "Class II" directors with terms
ending in 1999. The "Class III" directors are Robert D. Lurie, Jerry L. Calhoun
and Thomas G. Cigarran, and their term expires in 1998. Executive officers of
the Company are elected on an annual basis and serve at the discretion of the
Board of Directors. The following constitute the standing committees of the
Board of Directors:
Nominating Committee. The Nominating Committee develops general
criteria concerning the qualifications and selection of Board members and
recommends candidates for such positions to the Board of Directors.
Audit Committee. The Audit Committee makes recommendations to the
Board of Directors concerning the Company's financial statements and the
appointment of independent accountants, reviews significant audit and
accounting policies and practices, meets with the Company's independent
accountants concerning, among other things, the scope of audits and
reports, and reviews the performance of the overall accounting and
financial controls of the Company.
Compensation Committee. The Compensation Committee has the
responsibility for reviewing and approving salaries, bonuses, and other
compensation and benefits of executive officers, advising management
regarding benefits and other terms and conditions of compensation, and
administering the Company's employee stock incentive plan. No executive
officer of the Company served during 1996 as a member of the Compensation
Committee. The Company has no required disclosures regarding Compensation
Committee interlocks and insider participation in compensation decisions.
See "-- Compensation Pursuant to Plans."
DIRECTOR COMPENSATION
The Company has adopted and the shareholders have approved the 1997 Outside
Directors' Stock Incentive Plan ("1997 Outside Directors' Plan") that will
become effective upon the consummation of the Offering. An aggregate of 25,000
shares have been reserved for issuance pursuant to the 1997 Outside Directors'
Plan. The 1997 Outside Directors' Plan provides that, on the date of each Annual
Meeting of Shareholders beginning in 1998, each Outside Director (continuing to
serve as a director) will receive a restricted stock award of that number of
shares of Common Stock with a fair market value (as defined in the 1997 Outside
Directors' Plan) of $10,000. The restricted stock shall vest in one-third
increments with one-third vesting on the date of grant and the remaining shares
vesting equally on the first and second anniversary dates of the initial grant,
as long as the Outside Director continues to serve as a director of the Company.
No shares of restricted stock granted pursuant to the 1997 Outside Director's
Plan shall be sold, transferred, pledged, assigned, or otherwise alienated or
hypothecated, otherwise than by will or by the laws of descent and distribution
until the earlier of (i) five years from the date of grant and (ii) the date on
which the Outside Director ceases to serve as a director of the Company. Outside
Directors awarded such restricted stock may exercise full voting rights and
shall be entitled to receive all dividends and other distributions paid with
respect to such shares from the date of grant. Shares of restricted stock that
have not vested at the time of a grantee's resignation, removal, or failure to
be elected as a member of the Board of Directors shall be forfeited. In
addition, Outside Directors receive a $10,000 cash retainer annually and are
entitled to reimbursement from the Company for reasonable out-of-pocket expenses
incurred in connection with attending Board of Directors or committee meetings.
Pursuant to an agreement dated August 26, 1996, between the Company and
Lamar Alexander, Mr. Alexander agreed to serve as Vice Chairman. In his capacity
as Vice Chairman, Mr. Alexander works with the Company's Chief Executive Officer
regarding business development, strategic analysis and expanding
33
<PAGE> 35
the Company's educational focus. Mr. Alexander's compensation under this
agreement consists of (i) $72,000 per annum commencing July 1, 1997 and (ii) the
grant of an option for the purchase of an aggregate of 32,500 shares of Common
Stock at an exercise price of $7.69 per share. Options for the purchase of
19,500 shares are fully vested, and options for the purchase of the remaining
13,000 shares will vest on January 1 of 1998 and 1999. He shall serve in such
capacity during his current term, and, if nominated and re-elected as a
director, shall continue to serve in such capacity until August 2000.
EMPLOYMENT AGREEMENTS
Robert Lurie is employed by the Company under an Employment Agreement dated
August 27, 1995 (the "Employment Agreement"). Under the Employment Agreement,
Mr. Lurie is employed as President of The Resource Group for a term ending
August 27, 2000 and also serves as Chairman of the Board of Directors. As
compensation under the Employment Agreement, Mr. Lurie is paid a base salary and
is eligible for a performance bonus comparable to that of the other executive
officers of the Company, and he received a grant of an option to purchase
325,000 shares of Common Stock at $7.69 per share, which option vests in one-
fifth increments over a five-year vesting period. The Employment Agreement will
terminate upon death or permanent disability, may be terminated by the Company
for cause and may be terminated by Mr. Lurie for any reason upon 60 days'
written notice to the Company. In addition, pursuant to an Agreement Not To
Compete dated August 27, 1995 (the "Non-Compete Agreement"), Mr. Lurie has
agreed for a period of five years, upon his termination from the Company for any
reason, not to become employed, directly or indirectly, by, or to have a
significant financial interest in any other enterprise engaged in, the family
services business in which the Company is engaged in the United States. For such
Non-Compete Agreement, Mr. Lurie shall be paid an aggregate of $500,000, in
yearly installments of $100,000 beginning on the fourth business day following
the effective date of this Offering.
The Company has entered into agreements with each of the Named Executive
Officers (as hereinafter defined) other than Mr. Lurie whereby, upon the
termination of such person's employment under specified conditions within one
year following a change in control of the Company (as defined in the
agreements), such person would receive a cash payment of two times such person's
base salary at the time of the termination. In consideration of such payment,
the Named Executive Officer has agreed not to compete with the Company's
business during the term of employment and for one year following the
termination of such person's employment.
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<PAGE> 36
EXECUTIVE COMPENSATION AND OTHER INFORMATION
The following table sets forth the total compensation paid or accrued by
the Company on behalf of the Chief Executive Officer and the three next most
highly compensated executive officers of the Company whose aggregate salary and
bonus exceeded $100,000 (collectively, the "Named Executive Officers") for
services rendered in all capacities to the Company for the year ended December
27, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
AWARDS(1)
--------------------------
ANNUAL COMPENSATION RESTRICTED SECURITIES
--------------------------- STOCK UNDERLYING
NAME AND PRINCIPAL POSITION SALARY ($)(2) BONUS ($) AWARDS ($) OPTIONS (#)
- -------------------------------------------- ------------- --------- ---------- -----------
<S> <C> <C> <C> <C>
Marguerite W. Sallee........................ $ 126,855 $10,000 -- 188,500
President and Chief Executive Officer
Robert D. Lurie............................. 124,679 -- -- --
Chairman of the Board and President, The
Resource Group
David J. Gleason............................ 124,752 5,000 -- 165,100
Executive Vice President and Chief
Operating Officer
Michael E. Hogrefe.......................... 124,808 25,000 $292,500(3) 6,500
Executive Vice President, Chief Financial
Officer and Secretary
</TABLE>
- ---------------
(1) The Company did not grant any stock appreciation rights or make any
long-term incentive plan payouts during 1996.
(2) Includes amounts deferred by the employee under the Company's 401(k) plan.
(3) Mr. Hogrefe received a restricted stock grant for 32,500 shares of Common
Stock under the Company's 1996 Stock Incentive Plan, subject to the terms of
a Restricted Stock Award Agreement, including (i) a permanent restriction on
transfer in the form of a permanent right of first refusal in favor of the
Company to repurchase the shares at the then book value and (ii) forfeiture
in the event of Mr. Hogrefe's breach of confidentiality and non-competition
covenants or termination of Mr. Hogrefe's employment for cause as defined in
the agreement, which provisions are being terminated by action of the
Company's Board of Directors upon the closing of the Offering. Because there
was no trading market for the Common Stock as of December 27, 1996, the
value of the shares has been calculated on the basis of an assumed initial
public offering price of $9.00 per share.
The following table sets forth certain information concerning stock options
granted during 1996 to each of the Named Executive Officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE
-------------------------------------------------- AT ASSUMED ANNUAL
NUMBER OF PERCENT OF RATES
SECURITIES TOTAL OF STOCK APPRECIATION
UNDERLYING OPTIONS FOR
OPTIONS GRANTED TO EXERCISE OPTION TERMS
GRANTED EMPLOYEES IN PRICE EXPIRATION ---------------------
NAME (#) 1996 ($/SHARE) DATE 5% ($) 10% ($)
- ------------------------------- ---------- ------------ --------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Marguerite W. Sallee........... 188,500 40.87% $7.69 01/01/06 $911,897 $2,310,927
Robert D. Lurie................ -- -- -- -- -- --
David J. Gleason............... 165,100 35.80 7.69 01/01/06 798,696 2,024,053
Michael E. Hogrefe............. 6,500 1.41 7.69 01/01/06 31,445 79,687
</TABLE>
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<PAGE> 37
The following table sets forth certain information with respect to stock
options granted to the Named Executive Officers pursuant to the Company's stock
option plans. No Named Executive Officer exercised any options for the purchase
of Common Stock in 1996.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND 1996 YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF SECURITIES UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
DECEMBER 27, 1996 (#) DECEMBER 27, 1996(1)($)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Marguerite W. Sallee............................. 106,411 226,460 $ 353,876 $ 311,659
Robert D. Lurie.................................. 130,000 195,000 170,300 255,450
David J. Gleason................................. 94,380 202,020 309,643 278,041
Michael E. Hogrefe............................... -- 6,500 -- 8,515
</TABLE>
- ---------------
(1) There was no public trading market for the Common Stock as of December 27,
1996. Accordingly, these values have been calculated on the basis of an
assumed initial public offering price of $9.00 per share, less the
applicable exercise price.
COMPENSATION PURSUANT TO PLANS
The Company has historically granted options for the purchase of Common
Stock pursuant to the 1987 Stock Option Plan, the 1996 Stock Incentive Plan and
other contractual grants. As of July 23, 1997, options for the purchase of
1,546,421 shares of Common Stock were outstanding at a weighted average exercise
price per share of $7.26. The Company does not intend to make further grants
pursuant to those plans. The Company and shareholders have approved the 1997
Stock Incentive Plan.
1997 Stock Incentive Plan. The Company has adopted a stock incentive plan
(the "Stock Incentive Plan") that will become effective upon the consummation of
the Offering. Under the Stock Incentive Plan, the Compensation Committee has the
authority to grant to key employees and consultants of the Company the following
types of awards: (1) stock options; (2) stock appreciation rights; (3)
restricted stock; and/or (4) other stock-based awards. Pursuant to the Stock
Incentive Plan, 450,000 shares of Common Stock have been reserved and will be
available for distribution, which may include authorized and unissued shares or
treasury shares. Any shares as to which an option or other award expires, lapses
unexpired, or is forfeited, terminated or canceled may become subject to a new
option or other award. The Stock Incentive Plan will terminate on, and no award
may be granted later than, the tenth anniversary of the date of adoption of the
Stock Incentive Plan, but the exercise date of awards granted prior to such
tenth anniversary may extend beyond that date.
Incentive stock options ("ISOs") and non-qualified stock options may be
granted for such number of shares as the Committee may determine and may be
granted alone, in conjunction with, or in tandem with other awards under the
Stock Incentive Plan or cash awards outside the Stock Incentive Plan. A stock
option will be exercisable at such times and subject to such terms and
conditions as the Committee will determine. However, in the case of an ISO, the
term will be no more than ten years after the date of grant (five years in the
case of ISOs for certain 10% shareholders). The option price for an ISO will not
be less than 100% (110% in the case of certain 10% shareholders) of the fair
market value of the Common Stock as of the date of grant and for any
non-qualified stock option will not be less than 50% of the fair market value as
of the date of grant. Stock options and stock appreciation rights granted under
the Stock Incentive Plan may not be assigned or transferred other than by will
or by the laws of descent and distribution.
Stock appreciation rights may be granted under the Stock Incentive Plan in
conjunction with all or part of a stock option and will be exercisable only when
the underlying stock option is exercisable. Once a stock appreciation right has
been exercised, the related portion of the stock option underlying the stock
appreciation right will terminate. Upon the exercise of a stock appreciation
right, the Committee will pay to the employee or consultant in cash, Common
Stock or a combination thereof (the method of payment to be at the discretion
36
<PAGE> 38
of the Committee), an amount equal to the excess of the fair market value of the
Common Stock on the exercise date over the option price, multiplied by the
number of stock appreciation rights being exercised.
Restricted stock awards may be granted alone, in addition to, or in tandem
with, other awards under the Stock Incentive Plan or cash awards made outside
the Stock Incentive Plan. The provisions attendant to a grant of restricted
stock may vary from participant to participant. In making an award of restricted
stock, the Committee will determine the periods during which the restricted
stock is subject to forfeiture and may provide such other awards designed to
guarantee a minimum of value for such stock. During the restricted period, the
employee or consultant may not sell, transfer, pledge, or assign the restricted
stock but will be entitled to vote the restricted stock and to receive, at the
election of the Committee, cash or deferred dividends.
The Committee also may grant other types of awards such as performance
shares, convertible preferred stock, convertible debentures or other
exchangeable securities that are valued, as a whole or in part, by reference to
or otherwise based on the Common Stock. These awards may be granted alone, in
addition to, or in tandem with, stock options, stock appreciation rights,
restricted stock, or cash awards outside of the Stock Incentive Plan. Awards
will be made upon such terms and conditions as the Committee may determine.
If there is a change in control or a potential change in control of the
Company (as defined in the Stock Incentive Plan), stock appreciation rights and
limited stock appreciation rights outstanding for at least six months and any
stock options which are not then exercisable, in the discretion of the Board,
may become fully exercisable and vested. Notwithstanding the foregoing, stock
appreciation rights held by persons subject to Section 16(b) of the Exchange
Act, will be automatically exercised if the change in control or potential
change in control is not within the control of such person for purpose of Rule
16b-3(e)(3) of the Exchange Act. Also, in the discretion of the Board, the
restrictions and deferral limitations applicable to restricted stock and other
stock-based awards may lapse, and such shares and awards will be deemed fully
vested. Stock options, stock appreciation rights, limited stock appreciation
rights, restricted stock and other stock-based awards, will, unless otherwise
determined by the Committee in its sole discretion, be cashed out on the basis
of the change in control price (as defined in the Stock Incentive Plan and as
described below). The change in control price will be the highest price per
share paid in any transaction reported on the Nasdaq National Market or paid or
offered to be paid in any bona fide transaction relating to a change in control
or potential change in control at any time during the immediately preceding
60-day period. The Committee has the discretion to determine the change in
control price, based on the parameters described in the preceding sentence.
Employee Stock Purchase Plan. The Company and its shareholders have
adopted an employee stock purchase plan (the "Stock Purchase Plan") that will
become effective promptly following the Offering. An aggregate of 100,000 shares
of Common Stock has been reserved for issuance pursuant to the Stock Purchase
Plan. Under the Stock Purchase Plan, employees, including executive officers,
who have been employed by the Company continuously for at least one year are
eligible, as of the first day of any option period (January 1 through June 30,
or July 1 through December 31) (an "Option Period"), to contribute on an
after-tax basis up to 15% of their base pay per pay period through payroll
deductions to be used to purchase shares of Common Stock. Notwithstanding the
foregoing, no employee who is a 5% or greater shareholder of the Company's
voting stock is eligible to participate in the Stock Purchase Plan. On the last
trading day of each Option Period (the "Exercise Date"), the amount contributed
by each participant over the course of the Option Period will be used to
purchase shares of Common Stock at a purchase price per share equal to the
lesser of (a) 85% of the closing market price of the Common Stock on the
Exercise Date, or (b) 85% of the closing market price of the Common Stock on the
first trading date of such Option Period. The Stock Purchase Plan is intended to
qualify for favorable tax treatment under Section 423 of the Internal Revenue
Code of 1986, as amended (the "Code").
401(k) Retirement Savings Plan. Employees of the Company participate in a
savings plan (the "401(k) Plan") which is qualified under Sections 401(a) and
401(k) of the Code. To be eligible, an employee must have been employed by the
Company for at least twelve months. The 401(k) Plan permits employees to make
salary deferrals up to specified limits. Additional contributions may be made by
the Company at its
37
<PAGE> 39
discretion, and the Company makes a matching contribution equal to at least 25%
of an employee's salary deferral, limited to 6% of an employee's wages, which
contributions vest ratably over a six-year period.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The TBCA provides that a corporation may indemnify any of its directors and
officers against liability incurred in connection with a proceeding if (i) such
person acted in good faith, (ii) the director or officer reasonably believed, in
the case of conduct in an official capacity, that such conduct was in the
corporation's best interests, or, in all other cases, that such conduct was not
opposed to the best interests of the corporation, and (iii) in connection with
any criminal proceeding, the director or officer had no reasonable cause to
believe his or her conduct was unlawful. In actions brought by or in the right
of the corporation, however, the TBCA provides that no indemnification may be
made if the director or officer was adjudged liable to the corporation. The TBCA
also provides that in connection with any proceeding charging improper personal
benefit to an officer or director, no indemnification may be made if such
officer or director is adjudged liable on the basis that such personal benefit
was improperly received. In cases where the director or officer is wholly
successful, on the merits or otherwise, in the defense of any proceeding
instigated because of his or her status as an officer or director of a
corporation, the TBCA mandates that the corporation indemnify the director or
officer against reasonable expenses incurred in the proceeding. Notwithstanding
the foregoing, the TBCA provides that a court of competent jurisdiction, upon
application, may order that an officer or director be indemnified for reasonable
expenses if, in consideration of all relevant circumstances, the court
determines that such individual is fairly and reasonably entitled to
indemnification, even if such officer or director (i) was adjudged liable to the
corporation in a proceeding by or in right of the corporation, (ii) was adjudged
liable on the basis that personal benefit was improperly received, or (iii)
breached his or her duty of care to the corporation.
The Company's Charter provides that to the fullest extent permitted by
Tennessee law no director shall be personally liable to the Company or its
shareholders for monetary damages for breach of any fiduciary duty as a
director. Under the TBCA, this charter provision relieves the Company's
directors of personal liability to the Company or its shareholders for monetary
damages for breach of fiduciary duty as a director, except for liability arising
from a judgment or other final adjudication establishing (i) any breach of the
director's duty of loyalty, (ii) acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, or (iii) any
unlawful distributions. In addition, the Company's Bylaws provide that each
director and officer of the Company shall be indemnified by the Company to the
fullest extent allowed by Tennessee law, and the Company will enter into
indemnification agreements with each of the Company's directors and executive
officers (upon receipt of shareholder approval of the form of indemnification
agreement).
38
<PAGE> 40
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth information with respect to the beneficial
ownership of shares of the Common Stock (after giving effect to the conversion
of all shares of Series A Preferred Stock into 1,169,935 shares of Common Stock)
as of the date of this Prospectus, by: (i) each director of the Company; (ii)
each Named Executive Officer; (iii) each person known by the Company to own
beneficially more than 5% of the Company's Common Stock; (iv) each Selling
Shareholder; and (v) all directors and executive officers of the Company as a
group, both before and after giving effect to this Offering.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
THE OFFERING(1) SHARES TO BE THE OFFERING
MANAGEMENT AND FIVE PERCENT ------------------------ SOLD IN THE ------------------------
BENEFICIAL OWNERS NUMBER PERCENT OFFERING NUMBER PERCENT
- ------------------------------------- --------- ------- ------------ --------- -------
<S> <C> <C> <C> <C> <C>
Frontenac Venture V Limited
Partnership........................ 527,410(2) 17.2% 260,000 267,410 6.0%
Marriott Management Services Corp.... 467,912(3) 15.1 -- 467,912 10.5
Joseph J. Guzzo...................... 467,912(3) 15.1 -- 467,912 10.5
Massey Burch Investment Group and
related parties (as a group)....... 453,806(4) 14.8 453,481 325 *
Robert D. Lurie...................... 424,151(5)(6) 13.3 -- 424,151 9.3
The Valley Venture Fund Limited
Partnership........................ 269,040(4) 8.8 269,040 -- *
Trinity Ventures (as a group)........ 260,778(7) 8.5 -- 260,778 5.9
Marguerite W. Sallee................. 246,161(6)(8) 7.6 -- 246,161 5.4
David G. Gleason..................... 201,760(6)(9) 6.3 16,250 185,510 4.1
Trinity Ventures II, L.P............. 195,425(7) 6.4 -- 195,425 4.4
Lamar Alexander...................... 193,325(10) 6.3 4,768 188,557 4.2
Central Confederate Venture Fund
Limited Partnership................ 184,441(4) 6.0 184,441 -- *
Thomas G. Cigarran................... 68,076(11) 2.2 -- 68,076 1.5
Michael E. Hogrefe................... 33,800(12) 1.1 -- 33,800 *
E. Townes Duncan..................... 12,870(13) * -- 12,870 *
JoAnne Brandes....................... 780(14) * -- 780 *
Jerry L. Calhoun..................... -- * -- -- *
All directors and executive officers
as a group (10 persons)............ 1,648,835(15) 45.9 21,018 1,627,817 32.9
OTHER SELLING SHAREHOLDERS
Nelson Capital Partners, L.P......... 87,828 2.9 38,767 49,061 1.1
First Union National Bank............ 78,000 2.5 78,000 -- *
Distributees of Massey Burch Venture
Investors.......................... 77,027(16) 2.5 74,826 2,201 *
Robert M. Keeshan.................... 70,254 2.3 16,250 54,004 1.2
First American Corporation........... 40,170 1.3 40,170 -- *
Ruth W. Manecke...................... 14,906 * 3,250 11,656 *
John Wade............................ 8,276 * 8,276 -- *
A.L. Alexander....................... 5,962 * 5,962 -- *
</TABLE>
- ---------------
* Represents less than 1% of the Common Stock outstanding.
(1) Shares subject to options and warrants held by the persons shown in the
table which are exercisable within 60 days of July 24, 1997 are deemed
outstanding for the purpose of computing the percentage ownership of such
person and the percentage ownership of all executive officers and directors
as a group but are not deemed outstanding for the purpose of computing the
percentage ownership of the other persons shown in the table.
(2) Includes 7,410 shares of Common Stock issuable upon the exercise of
outstanding options owned by Frontenac Company, an affiliate of Frontenac
Venture V Limited Partnership. Frontenac Company is the general partner of
Frontenac Venture V Limited Partnership and is deemed to be a beneficial
owner
39
<PAGE> 41
of such shares. Frontenac Company disclaims beneficial ownership of such
shares except to the extent of its pecuniary interest. The principal
address is 135 South LaSalle Street, Suite 3800, Chicago, Illinois 60604.
In the event that the Underwriters' over-allotment option is exercised in
full, Frontenac Venture V Limited Partnership would sell an additional
260,000 shares of Common Stock and would beneficially own 7,410 shares
after the Offering.
(3) Includes 780 shares of Common Stock issuable upon the exercise of
outstanding options and 26,000 shares issuable upon the exercise of a
warrant, both of which are held by Marriott Management Services Corp. Mr.
Guzzo is an officer of an affiliate of Marriott Management Services Corp.
and shares voting and investment power with respect to the shares
indicated. The principal address for Marriott Management Services Corp. is
1 Marriott Drive, Washington, D.C. 20058.
(4) The business address of Massey Burch Investment Group, Inc. ("Massey
Burch") and related entities is 310 25th Avenue North, #103, Nashville,
Tennessee 37203. The entities whose shares are included as parties related
to Massey Burch include (i) Central Confederate Venture Fund Limited
Partnership; (ii) The Valley Venture Funds Limited Partnership; and (iii)
Massey Burch Investment Group Pension Plan. Donald M. Johnston, Lucius E.
Burch III and Frank B. Sheffield, Jr. are the principals of Massey Burch,
affiliates of which are investment managers and general partners of Central
Confederate Venture Fund Limited Partnership, The Central Confederate
Venture Fund and The Valley Venture Fund Limited Partnership. Certain
investment management services with respect to the foregoing investment
partnerships are also provided by Massey Burch Capital Corp., the
principals of which are Donald M. Johnston, William Earthman, III, Benjamin
H. Gray, J. Donald McLemore, Jr., and Lucius E. Burch, IV. Accordingly, the
foregoing named principals, Massey Burch and Massey Burch Capital Corp. may
be deemed to be the beneficial owners of shares owned by each of the
foregoing investment partnerships. Massey Burch and certain of its
principals may hold powers of attorney for certain of its investment
advisory clients under which they share voting and investment power with
respect to the shares indicated.
(5) Includes 130,000 shares of Common Stock issuable upon the exercise of
outstanding options and 1,651 shares owned by Mr. Lurie's wife, Jane
Kyle-Lurie. Mr. Lurie disclaims beneficial ownership of the shares held by
his wife.
(6) The principal address of such person is c/o CorporateFamily Solutions,
Inc., 209 10th Avenue South, Suite 300, Nashville, Tennessee 37203.
(7) Includes an option for the purchase of 780 shares of Common Stock held by
Trinity Ventures II, L.P. The entities whose shares are included as
affiliated parties related to Trinity Ventures (as a group) include (i)
Trinity Ventures II, L.P; (ii) Trinity Ventures III, L.P.; and (iii)
Trinity Side By Side Fund I, L.P. The following persons are general
partners of the above referenced funds and are deemed to be beneficial
owners of such shares: Noel J. Fenton, David Nierenberg, James G. Shennan
and Lawrence K. Orr. Each individual disclaims beneficial ownership of such
shares except to the extent of their pecuniary interests. The principal
address is 300 Sand Hill Road, Building 1, Suite 240, Menlo Park,
California.
(8) Includes 161,011 shares of Common Stock issuable upon the exercise of
outstanding options.
(9) Includes 143,260 shares of Common Stock issuable upon the exercise of
outstanding options.
(10) Includes 20,410 shares of Common Stock issuable upon the exercise of
outstanding options and 98,383 shares owned by Mr. Alexander's wife, Leslee
B. Alexander, individually and as trustee for Mr. Alexander's children. Mr.
Alexander disclaims beneficial ownership of the shares held by record and
as trustee by Mrs. Alexander. Mr. Alexander's principal address is P. O.
Box 22275, Nashville, Tennessee 37202. The shares being sold in the
Offering are being sold for the benefit of Mr. Alexander's children.
(11) Includes 30,810 shares of Common Stock issuable upon the exercise of
outstanding options.
(12) Includes 32,500 shares of restricted stock and 1,300 shares of Common Stock
issuable upon the exercise of outstanding options.
(13) Includes 11,310 shares of Common Stock issuable upon the exercise of
outstanding options.
(14) Includes 780 shares of Common Stock issuable upon the exercise of
outstanding options.
(15) Includes 525,661 shares of Common Stock issuable upon the exercise of
outstanding options and warrants.
(16) The distributees are comprised of 49 persons or entities, none of whom have
held any position, office or material relationship with the Company within
the past three years.
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<PAGE> 42
CERTAIN TRANSACTIONS
The Company purchases food from Marriott International, Inc. ("Marriott")
for use in several Family Centers managed by the Company. Marriott is the record
owner of 441,134 shares of the Company's Common Stock and holds options and
warrants for the purchase of 26,780 shares of Common Stock. In the years 1994,
1995 and 1996, the Company made food purchases from Marriott totaling
approximately $330,000, $420,000 and $417,000, respectively. The Company also
has an agreement with Marriott to operate and manage a Family Center for its
employees. During the years 1994, 1995 and 1996, the Company received management
fees from Marriott totaling $51,500, $53,300, and $57,780, respectively. Joseph
Guzzo, a member of the Board of Directors of the Company, is the President of
International Operations for Marriott Management Services Corp.
The Company has also entered into agreements with S.C. Johnson & Son, Inc.
(i) to operate and manage a Family Center for its employees and (ii) for
consulting services provided on an ongoing basis. During the year 1996, the
Company received management fees from S.C. Johnson & Son, Inc. with respect to
operation of its Family Center totaling $50,000, and the Company received
consulting fees totaling $25,000. Management fees of $12,500 were paid by S.C.
Johnson & Son, Inc. for the year 1995 pursuant to a management contract with
RCCM. Prior to the fourth quarter of 1995, the Company received no revenue from
such contract. JoAnne Brandes, a member of the Board of Directors of the
Company, is Vice President of Corporate Communication Worldwide for S.C. Johnson
& Son, Inc.
The Company has entered into agreements with The Boeing Company (i) to
operate and manage a Family Center for its employees and (ii) to consult with
the Company concerning work and family issues. The Company expects to receive a
management fee of $75,000 and a consulting fee of $45,000 pursuant to its
contracts with Boeing in 1997. In 1996, the Company received a fee of $40,000
relating to a consulting contract and to the development of a Family Center.
Jerry L. Calhoun, a member of the Board of Directors of the Company, is employed
as Vice President of Employee and Union Relations at The Boeing Company.
Robert D. Lurie, Chairman of the Board of Directors of the Company and
President of The Resource Group, received $3.1 million in cash and 292,500
shares of the Company's Common Stock as consideration for the acquisition of his
interest in RCCM in October 1995. Mr. Lurie's wife, Jane Kyle-Lurie, received
$13,022 in cash and 1,651 shares of the Company's Common Stock in consideration
of the acquisition of her interest in RCCM.
The Company believes that the above-mentioned transactions between the
Company and its directors, officers, or other affiliates were, and that future
transactions will be, on terms no less favorable to the Company than can be
obtained from unaffiliated third parties.
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<PAGE> 43
DESCRIPTION OF CAPITAL STOCK
The Company is authorized to issue 100,000,000 shares of Common Stock, no
par value per share, and 10,000,000 shares of preferred stock, no par value per
share ("Preferred Stock"). As of the date of this Prospectus, 3,066,848 shares
of Common Stock were issued and outstanding and were held of record by 170
shareholders.
COMMON STOCK
The holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by shareholders. Subject to prior dividend rights and
sinking fund or redemption or purchase rights that may be applicable to any
outstanding Preferred Stock, the holders of Common Stock are entitled to share
ratably in such dividends, if any, as may be declared from time to time by the
Board of Directors in its discretion out of funds legally available therefor.
See "Dividend Policy." The holders of Common Stock are entitled to share ratably
in any assets remaining after satisfaction of all prior claims upon liquidation
of the Company. The holders of Common Stock are not entitled to cumulative
voting in the election of directors, which means that the holders of a majority
of the shares voting for the election of directors can elect all of the
directors then standing for election by the holders of Common Stock. The
Company's Charter provides that the members of the Board of Directors are
divided into three classes, consisting as nearly as practicable of one-third of
the total number of directors, each class of which serves a term of three years.
The Company's Charter gives holders of Common Stock no preemptive or other
subscription or conversion rights, and there are no redemption provisions with
respect to such shares. All outstanding shares of Common Stock are, and the
shares offered hereby when sold in the manner contemplated by this Prospectus
will be, fully paid and nonassessable. The rights, preferences and privileges of
holders of Common Stock are subject to, and may be adversely affected by, the
rights of holders of shares of any series of Preferred Stock which the Company
may designate and issue in the future.
PREFERRED STOCK
Prior to the effectiveness of this Offering, the Company will have
1,125,000 shares of Series A Preferred Stock authorized and outstanding. Upon
completion of this Offering, all of these shares will convert into shares of
Common Stock. Pursuant to the conversion terms, the outstanding Series A
Preferred Stock will be converted into an aggregate of 1,169,935 shares of
Common Stock. Thereafter, the Series A Preferred Stock will be canceled and
cease to exist under the Company's Charter, and the Company will have no
outstanding class of Preferred Stock but will have 10,000,000 shares of
Preferred Stock authorized and available for issuance.
The authorized Preferred Stock may be issued from time to time in one or
more designated series or classes. Subject to the provisions of the Company's
Charter and limitations prescribed by law, the Board of Directors, without
further action or vote by the shareholders, is authorized to establish the
voting, dividend, redemption, conversion, liquidation, and other relative
provisions as may be provided in a particular series or class. The issuance of
Preferred Stock, while providing flexibility in connection with possible
acquisitions and other corporate purposes, could, among other things, adversely
affect the voting power of the holders of Common Stock and, under certain
circumstances, make it more difficult for a third party to acquire, or
discourage a third party from acquiring, a majority of the outstanding voting
stock of the Company. The Company has no present intention to issue any series
or class of Preferred Stock.
WARRANTS
A warrant for the purchase of up to 26,000 shares of Common Stock is
currently outstanding. The warrant is exercisable in whole or in part upon
providing a written notice of exercise and payment in full to the Company of the
exercise price. The exercise price is $6.15 per share. The warrant expires on
January 15, 1998.
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<PAGE> 44
REGISTRATION RIGHTS
Following the consummation of the Offering, beneficial holders of an
aggregate of 546,586 shares of Common Stock ("Demand Registrable Shares") will
have contracted rights with respect to the registration of the sale of such
shares. Beginning 180 days after the date of this Prospectus (the "IPO Date"),
the holders of the Demand Registrable Shares then outstanding have the right to
one demand registration on Form S-1 (or its successor form) upon written demand
to the Company by the holders of 66 2/3% of such shares. On or after the date
the Company is entitled to register the Demand Registrable Shares on Form S-3
(or any similar short form registration statement), the holders of such shares
may, at any time, demand registration of such shares, so long as the aggregate
offering value of such shares is equal to or exceeds $1,000,000.
In addition, the beneficial holders of the above shares and the beneficial
holders of an additional 83,988 shares of Common Stock (together with the Demand
Registrable Shares, the "Incidental Registrable Shares") may require the Company
to include all or a portion of such holder's Incidental Registrable Shares in a
registration statement filed by the Company for its own account, provided, among
other conditions, that the managing underwriter (if any) of such offering has
the right, subject to certain conditions, to limit the number of Incidental
Registrable Shares included in such registration statement. If the managing
underwriter limits the number of Incidental Registrable Shares that can be
included in a demand registration, the Incidental Registrable Shares that are
also Demand Registrable Shares shall be first included.
In general, all fees, costs and expenses of such registrations (other than
underwriting commissions, dealers' fees, broker's fees and concessions
applicable to the Common Stock) will be borne by the Company. The registration
rights set forth above shall terminate as of the fifth anniversary of the IPO
Date.
CERTAIN PROVISIONS OF THE CHARTER, BYLAWS AND TENNESSEE LAW
General. The provisions of the Charter, the Bylaws, and Tennessee
statutory law described in this section may delay or make more difficult
acquisitions or changes of control of the Company that are not approved by the
Board of Directors. Such provisions have been implemented to enable the Company,
particularly (but not exclusively) in the initial years of its existence as an
independent, publicly-owned company, to develop its business in a manner that
will foster its long-term growth without the disruption of the threat of a
takeover not deemed by the Board of Directors to be in the best interests of the
Company and its shareholders.
Directors. Pursuant to the Company's Charter, the members of the Board of
Directors are divided into three classes, each of which serves a term of three
years. The Bylaws provide that the number of directors shall be no fewer than
five or more than fifteen, with the exact number to be established by the Board
of Directors and subject to change from time to time as determined by the Board
of Directors, and that vacancies on the Board of Directors (including vacancies
created by an increase in the number of directors) may be filled by the Board of
Directors, acting by a majority of the remaining directors then in office, or by
a plurality of the votes cast by the shareholders at a meeting at which a quorum
is present. Officers are elected annually by and serve at the pleasure of the
Board of Directors.
The Charter provides that directors may be removed only for cause and only
by (i) the affirmative vote of the holders of a majority of the voting power of
all the shares of the Company's capital stock then entitled to vote in the
election of directors, voting together as a single class, unless the vote of a
special voting group is otherwise required by law, or (ii) the affirmative vote
of a majority of the entire Board of Directors then in office. This provision,
in conjunction with the provision of the Charter authorizing the Board of
Directors to fill vacant directorships, could prevent shareholders from removing
incumbent directors without cause and filling the resulting vacancies with their
own nominees.
Advance Notice for Shareholder Proposals or Making Nominations at
Meetings. The Bylaws establish an advance notice procedure for shareholder
proposals to be brought before a meeting of shareholders of the Company and for
nominations by shareholders of candidates for election as directors at an annual
meeting or a special meeting at which directors are to be elected. Subject to
any other applicable requirements, only such business may be conducted at a
meeting of shareholders as has been brought before the meeting by, or at the
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direction of, the Board of Directors, or by a shareholder who has given to the
Secretary of the Company timely written notice in proper form, of the
shareholder's intention to bring that business before the meeting. The presiding
officer at such meeting has the authority to make such determinations. Only
persons who are selected and recommended by the Board of Directors, or the
committee of the Board of Directors designated to make nominations, or who are
nominated by a shareholder who has given timely written notice, in proper form,
to the Secretary prior to a meeting at which directors are to be elected will be
eligible for election as directors of the Company.
To be timely, notice of nominations or other business to be brought before
any meeting must be received by the Secretary of the Company not later than 120
days in advance of the anniversary date of the Company's proxy statement for the
previous year's annual meeting or, in the case of special meetings, at the close
of business on the tenth day following the date on which notice of such meeting
is first given to shareholders.
The notice of any shareholder proposal or nomination for election as
director must set forth various information required under the Bylaws. The
person submitting the notice of nomination and any person acting in concert with
such person must provide, among other things, the name and address under which
they appear on the Company's books (if they so appear) and the class and number
of shares of the Company's capital stock that are beneficially owned by them.
Amendment of the Bylaws and Charter. The Bylaws provide that a majority of
the members of the Board of Directors who are present at any regular or special
meeting or the holders of a majority of the voting power of all shares of the
Company's capital stock represented at any regular or special meeting have the
power to amend, alter, change, or repeal the Bylaws.
Except as may be set forth in resolutions providing for any class or series
of Preferred Stock and except for provisions in the Charter establishing (i) the
designation of three classes of directors; (ii) the allowance of the removal of
directors only for cause; and (iii) the requirements to call a special meeting
of shareholders, each of which provisions require the affirmative vote of
holders of two-thirds of the voting power of the shares entitled to vote at an
election of directors, any proposal to amend, alter, change, or repeal any other
provision of the Charter requires approval by the affirmative vote of both a
majority of the members of the Board of Directors then in office and the holders
of a majority of the voting power of all of the shares of the Company's capital
stock entitled to vote on the amendments, with shareholders entitled to
dissenters' rights as a result of the Charter amendment voting together as a
single class. Shareholders entitled to dissenters' rights as a result of a
Charter amendment are those whose rights would be materially and adversely
affected because the amendment (i) alters or abolishes a preferential right of
the shares; (ii) creates, alters, or abolishes a right in respect of redemption;
(iii) alters or abolishes a preemptive right; (iv) excludes or limits the right
of the shares to vote on any matter, or to cumulate votes, other than a
limitation by dilution through issuance of shares or other securities with
similar voting rights; or (v) reduces the number of shares held by such holder
to a fraction if the fractional share is to be acquired for cash. In general,
however, no shareholder is entitled to dissenter's rights if the security he or
she holds is listed on a national securities exchange or the Nasdaq National
Market.
Anti-Takeover Legislation. The Tennessee Business Combination Act (the
"Combination Act") provides, among other things, that any corporation to which
the Combination Act applies, including the Company, shall not engage in any
"business combination" with an "interested shareholder" for a period of five
years following the date that such shareholder became an interested shareholder
unless prior to such date the board of directors of the corporation approved
either the business combination or the transaction which resulted in the
shareholder becoming an interested shareholder. Pursuant to an exemption
provided by the Combination Act, Frontenac Venture V Limited Partnership,
Marriott Management Services Corp. and Robert Lurie would not be "interested
shareholders" subject to this provision.
The Combination Act defines "business combination," generally, to mean any:
(i) merger or consolidation; (ii) share exchange; (iii) sale, lease, exchange,
mortgage, pledge, or other transfer (in one transaction or a series of
transactions) of assets representing 10% or more of (A) the market value of
consolidated assets, (B) the market value of the corporation's outstanding
shares or (C) the corporation's consolidated net income; (iv) issuance or
transfer of shares from the corporation to the interested shareholder; (v) plan
of
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<PAGE> 46
liquidation; (vi) transaction in which the interested shareholder's
proportionate share of the outstanding shares of any class of securities is
increased; or (vii) financing arrangements pursuant to which the interested
shareholder, directly or indirectly, receives a benefit except proportionately
as a shareholder.
The Combination Act defines "interested shareholder," generally, to mean
any person who is the beneficial owner, either directly or indirectly, of 10% or
more of any class or series of the outstanding voting stock, or any affiliate or
associate of the corporation who has been the beneficial owner, either directly
or indirectly, of 10% or more of the voting power of any class or series of the
corporation's stock at any time within the five-year period preceding the date
in question. Consummation of a business combination that is subject to the
five-year moratorium is permitted after such period if the transaction (i)
complies with all applicable charter and bylaw requirements and applicable
Tennessee law and (ii) is approved by the affirmative vote of at least
two-thirds of the outstanding voting stock not beneficially owned by the
interested shareholder, or when the transaction meets certain fair price
criteria. The fair price criteria include, among others, the requirement that
the per share consideration received in any such business combination by each of
the shareholders is equal to or exceeds the higher of (i) the highest per share
price paid by the interested shareholder during the preceding five-year period
for shares of the same class or series plus interest thereon from such date at a
treasury bill rate less the aggregate amount of any cash dividends paid and the
market value of any dividends paid other than in cash since such earliest date,
up to the amount of such interest, (ii) the highest preferential amount, if any,
such class or series is entitled to receive on liquidation, or (iii) the market
value of the shares on either the date the business combination is announced or
the date when the interested shareholder reaches the 10% threshold, whichever is
higher, plus interest thereon less dividends as noted above.
The Tennessee Control Share Acquisition Act (the "Acquisition Act")
prohibits certain shareholders from exercising in excess of 20% of the voting
power in a corporation acquired in a "control share acquisition," as defined in
the Acquisition Act, unless such voting rights have been previously approved by
the disinterested shareholders of the corporation. The Company has not elected
to make the Acquisition Act applicable to the Company. No assurance can be given
that such election, which must be expressed in a charter or bylaw amendment,
will or will not be made in the future.
The Tennessee Greenmail Act (the "Greenmail Act") prohibits the Company
from purchasing or agreeing to purchase any of its securities, at a price in
excess of fair market value, from a holder of 3% or more of any class of such
securities who has beneficially owned such securities for less than two years,
unless such purchase has been approved by the affirmative vote of a majority of
the outstanding shares of each class of voting stock issued by the Company or
the Company makes an offer of at least equal value per share to all holders of
shares of such class.
The effect of the Combination Act, the Acquisition Act, and the Greenmail
Act may be to render more difficult a change of control of the Company.
TRANSFER AGENT AND REGISTRAR
SunTrust Bank, Nashville, N.A. will be the transfer agent and registrar for
the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this Offering, there has been no public market for the Common
Stock of the Company, and there can be no assurance that a significant public
market for the Common Stock will be developed or sustained after the Offering.
No prediction can be made as to the effect, if any, that market sales of shares
or the availability of shares for sale will have on the market price prevailing
from time to time. Sales of substantial amounts of Common Stock of the Company
in the public market after the restrictions described below lapse could
adversely affect the prevailing market price and the ability of the Company to
raise equity capital in the future.
Upon completion of this Offering, the Company will have outstanding
4,416,848 shares of Common Stock (4,468,234 shares if the Underwriters'
over-allotment option is exercised in full). Of these shares, the 2,350,000
shares of Common Stock sold in this Offering (2,702,500 shares if the
underwriters' over-allotment option is exercised in full) will be freely
tradeable without restriction or limitation under the Securities Act, except to
the extent such shares are subject to the agreement with the representatives of
the Underwriters
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<PAGE> 47
described below, and except for any shares purchased by "affiliates," as that
term is defined under the Securities Act, of the Company. The remaining
2,066,848 shares are "restricted securities" within the meaning of Rule 144
adopted under the Securities Act (the "Restricted Shares"). The Restricted
Shares were issued and sold by the Company in private transactions in reliance
upon exemptions from registration under the Securities Act, and none of such
shares may be sold in the public market, except in compliance with the
registration requirements of the Securities Act or pursuant to an exemption from
registration, such as the exemption provided by Rule 144 under the Securities
Act. Upon consummation of the Offering, the beneficial holders of 630,574 of the
Restricted Shares will have certain registration rights with respect to the sale
of such shares. See "Description of Capital Stock -- Registration Rights."
In general, under Rule 144 any person (or persons whose shares are
aggregated), including an affiliate, who has beneficially owned shares for at
least a one-year period (as computed under Rule 144) is entitled to sell within
any three-month period a number of shares that does not exceed the greater of
(i) one percent of the then outstanding shares of Common Stock (approximately
44,168 shares after giving effect to this Offering), and (ii) the average weekly
trading volume of the Company's Common Stock during the four calendar weeks
immediately preceding the date on which the notice of sale is filed with the
Securities and Exchange Commission (the "Commission"). Sales under Rule 144 are
also subject to certain provisions relating to the manner and notice of sale and
the availability of current public information about the Company. A shareholder
who is not an affiliate of the Company at any time during the 90 days
immediately preceding a sale, and who has beneficially owned his or her shares
for at least two years (as computed under Rule 144), is entitled to sell such
shares under Rule 144(k) without regard to the volume, manner and notice of
sale, and availability of public information limitations described above. Shares
properly sold in reliance upon Rule 144 to persons who are not affiliates are
thereafter freely tradeable without restrictions or registration under the
Securities Act.
The Company, the Company's executive officers and directors, and certain
other shareholders have agreed not to offer, sell, or otherwise dispose of any
of their Restricted Shares (in the aggregate, representing approximately 41.6%
of the shares outstanding after the Offering) for a period of 180 days after the
date of this Prospectus (the "Lock-up Period") without the prior consent of
Montgomery Securities. Notwithstanding the preceding sentence, the Company may
grant options to purchase or award shares of Common Stock under the Stock
Incentive Plan and the Stock Purchase Plan and issue shares in connection with
acquisitions. Of the persons holding 228,107 restricted shares not subject to a
lock-up with the Underwriters, no person holds more than 0.75% of the
outstanding shares.
As soon as practicable following the consummation of this Offering, the
Company intends to file a registration statement under the Securities Act to
register approximately 2,121,421 shares of Common Stock issuable pursuant to the
Company's stock incentive plans and stock purchase plan. See "Management --
Compensation Pursuant to Plans." Shares issued pursuant to such plans after the
effective date of such registration statement will be available for sale in the
open market subject to the Lock-up Period, if applicable.
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UNDERWRITING
The Underwriters named below (the "Underwriters"), represented by
Montgomery Securities and J.C. Bradford & Co. (the "Representatives"), have
severally agreed, subject to the terms and conditions set forth in the
underwriting agreement (the "Underwriting Agreement") by and among the Company,
the Selling Shareholders and the Underwriters, to purchase from the Company and
the Selling Shareholders the number of shares of Common Stock indicated below
opposite their respective names at the initial public offering price less the
underwriting discount set forth on the cover page of this Prospectus. The
Underwriting Agreement provides that the obligations of the Underwriters are
subject to certain conditions precedent and that the Underwriters are committed
to purchase all of such shares of Common Stock if they purchase any.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- ---------------------------------------------------------------------------------- ---------
<S> <C>
Montgomery Securities.............................................................
J.C. Bradford & Co................................................................
---------
Total................................................................... 2,350,000
========
</TABLE>
The Representatives have advised the Company and the Selling Shareholders
that the Underwriters propose initially to offer the Common Stock to the public
on the terms set forth on the cover page of this Prospectus. The Underwriters
may allow to selected dealers a concession of not more than $ per share; and
the Underwriters may allow, and such dealers may reallow, a concession of not
more than $ per share to certain other dealers. After the initial public
offering, the offering price and other selling terms may be changed by the
Representatives. The Common Stock is offered subject to receipt and acceptance
by the Underwriters, and to certain other conditions, including the right to
reject orders in whole or in part.
The Company and certain of the Selling Shareholders have granted an option
to the Underwriters, exercisable during the 30-day period after the date of this
Prospectus, to purchase up to a maximum of 352,500 additional shares of Common
Stock to cover over-allotments, if any, at the same price per share as the
initial shares to be purchased by the Underwriters. To the extent that the
Underwriters exercise such over-allotment option, the Underwriters will be
committed, subject to certain conditions, to purchase such additional shares in
approximately the same proportion as set forth in the above table. The
Underwriters may purchase such shares only to cover over-allotments made in
connection with this Offering.
The Underwriting Agreement provides that the Company and the Selling
Shareholders will severally indemnify the Underwriters against certain
liabilities, including civil liabilities under the Securities Act, or will
contribute to payments the Underwriters may be required to make in respect
thereof.
The Company's officers and directors, the Selling Shareholders and certain
other holders of the Common Stock who, immediately following the Offering
(assuming no exercise of the Underwriters' over-allotment option) collectively
will beneficially own an aggregate of 1,838,741 shares of Common Stock, have
agreed that for a period of 180 days after the effective date of the Offering
they will not, without the prior written consent of Montgomery Securities,
directly or indirectly, offer for sale, sell, solicit an offer to sell, contract
or grant an option to sell, pledge, transfer, establish an open put equivalent
position or otherwise dispose of any shares of Common Stock, options or warrants
to acquire shares of Common Stock or securities exchangeable or exercisable or
convertible into shares of Common Stock held by them. The Company has also
agreed not to issue, offer, sell, grant options to purchase or otherwise dispose
of any of the Company's equity securities or any other securities convertible
into or exchangeable with its Common Stock for a period of 180 days after the
effective date of the Offering without the prior written consent of Montgomery
Securities except pursuant to the Company's stock incentive and employee stock
purchase plans or pursuant to acquisitions. The holder of the warrant issued by
the Company has also agreed not to offer, sell or otherwise dispose of any
shares of Common Stock issuable upon exercise of the warrant for a period of 180
days after the closing of the Offering without the prior written consent of
Montgomery Securities. In evaluating any request for a waiver of the 180-day
lock-up period, the underwriters will consider, in accordance with their
customary practice, all relevant facts and circumstances at the time of the
request including, without limitation, the recent trading market for
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<PAGE> 49
the Common Stock, the size of the request and, with respect to a request by the
Company to issue additional equity securities, the purpose of such Issuance. See
"Shares Eligible for Future Sale."
Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriters and
certain selling group members to bid for and purchase the Common Stock. As an
exception to these rules, the Underwriters are permitted to engage in certain
transactions that stabilize the price of the Common Stock. Such transactions
consist of bids or purchases for the purpose of pegging, fixing or maintaining
the price of the Common Stock.
If the Underwriters create a short position in the Common Stock in
connection with the offering, i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus, the Underwriters may
reduce that short position by purchasing Common Stock in the open market. The
underwriters may also elect to reduce any short position by exercising all or
part of the over-allotment option described above.
The Underwriters may also impose a penalty bid on certain selling group
members. This means that if the Underwriters purchase shares of Common Stock in
the open market to reduce the Underwriters' short position or to stabilize the
price of the Common Stock, they may reclaim the amount of the selling concession
from the selling group members who sold those shares as part of the Offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security. Neither the Company nor any of the
Underwriters makes any representation or predictions as to the direction or
magnitude of any effect that the transactions described above may have on the
price of the Common Stock. In addition, neither the Company nor any of the
Underwriters makes any representation that the Underwriters will engage in such
transactions or that such transactions, once commenced, will not be discontinued
without notice.
The Representatives have informed the Company that the Underwriters do not
expect to make sales of Common Stock offered by this Prospectus to accounts over
which they exercise discretionary authority in excess of 5% of the number of
shares of Common Stock offered hereby.
Prior to the Offering, there has been no public trading market for the
Common Stock. Consequently, the initial public offering price of the Common
Stock has been determined by negotiations among the Company, the Selling
Shareholders and the Representatives. Among the factors to be considered in such
negotiations were the history of, and the prospects for, the Company and the
industry in which it competes, an assessment of the Company's management, its
financial condition, its past and present earnings and the trend of such
earnings, the prospects for future earnings of the Company, the present state of
the Company's development, the general condition of the economy and the
securities markets at the time of the Offering and the market prices of and the
demand for publicly traded common stock of comparable companies in recent
periods.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company and the Selling Shareholders by Bass, Berry & Sims PLC,
Nashville, Tennessee. Certain members of Bass, Berry & Sims PLC beneficially own
14,280 shares of Common Stock. Certain legal matters in connection with this
Offering will be passed upon for the Underwriters by Piper & Marbury L.L.P.,
Baltimore, Maryland.
EXPERTS
The consolidated financial statements of the Company as of December 29,
1995 and December 27, 1996, and for each year of the three years in the
respective periods ended December 30, 1994, December 29, 1995 and December 29,
1996, appearing in this Prospectus and Registration Statement, have been audited
by Arthur Andersen LLP, independent public accountants, as indicated in their
report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
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<PAGE> 50
The consolidated statements of operations, shareholders' equity and
cashflows of RCCM for the nine months ended September 30, 1995, appearing in
this Prospectus and Registration Statement, have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
The consolidated financial statements of RCCM as of December 31, 1994 and
the year then ended appearing in this Prospectus and Registration Statement,
have been audited by Trien, Rosenberg, Rosenberg, Weinberg, Ciullo & Fazzari,
LLP (formerly Trien, Rosenberg, Felix, Rosenberg, Barr & Weinberg), independent
public accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said reports.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (the "Registration Statement") under the Securities Act with respect to the
shares of Common Stock offered by this Prospectus. This Prospectus, which is a
part of the Registration Statement, does not contain all of the information set
forth in the Registration Statement or the exhibits and schedules thereto,
certain portions having been omitted pursuant to the rules and regulations of
the Commission. For further information with respect to the Company and the
Common Stock, reference is made to the Registration Statement, including the
exhibits and schedules thereto.
The Registration Statement and the exhibits and schedules thereto filed
with the Commission may be inspected, without charge, at the public reference
facility maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's Regional Offices
located at Seven World Trade Center, 13th floor, New York, New York 10048, and
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material may also be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The Commission maintains a web site that contains reports, proxy
statements and other information regarding registrants, including the company.
The address of the Commission's web site is http://www.sec.gov.
As a result of the Offering, the Company will be subject to the information
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). So long as the Company is subject to periodic reporting requirements of
the Exchange Act, it will continue to furnish the reports and other information
required thereby to the Commission. The Company intends to furnish its
shareholders with annual reports containing financial statements audited by its
independent public accountants and quarterly reports for the first three
quarters of each year containing unaudited financial information.
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<PAGE> 51
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CORPORATEFAMILY SOLUTIONS, INC.
Report of Independent Public Accountants.............................................. F-2
Consolidated Balance Sheets as of December 29, 1995, December 27, 1996 and June 27,
1997 (unaudited).................................................................... F-3
Consolidated Statements of Income for each of the three years ended December 30, 1994,
December 29, 1995 and December 27, 1996 and each of the six month periods ended June
28, 1996 (unaudited) and June 27, 1997 (unaudited).................................. F-4
Consolidated Statements of Shareholders' Equity for each of the three years ended
December 30, 1994, December 29, 1995 and December 27, 1996 and the six months ended
June 27, 1997 (unaudited)........................................................... F-5
Consolidated Statements of Cash Flows for each of the three years ended December 30,
1994, December 29, 1995 and December 27, 1996 and each of the six month periods
ended June 28, 1996 (unaudited) and June 27, 1997 (unaudited)....................... F-6
Notes to Consolidated Financial Statements............................................ F-7
RESOURCES FOR CHILD CARE MANAGEMENT, INC.
Report of Independent Public Accountants.............................................. F-22
Consolidated Statement of Operations for the nine months ended September 30, 1995..... F-23
Consolidated Statement of Shareholders' Equity for the nine months ended September 30,
1995................................................................................ F-24
Consolidated Statement of Cash Flows for the nine months ended September 30, 1995..... F-25
Notes to Consolidated Financial Statements............................................ F-26
Report of Independent Public Accountants.............................................. F-29
Consolidated Statement of Operations for the year ended December 31, 1994............. F-30
Consolidated Statement of Shareholders' Equity for the year ended December 31, 1994... F-31
Consolidated Statement of Cash Flows for the year ended December 31, 1994............. F-32
Notes to Consolidated Financial Statements............................................ F-33
</TABLE>
F-1
<PAGE> 52
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To CorporateFamily Solutions, Inc.:
We have audited the accompanying consolidated balance sheets of
CORPORATEFAMILY SOLUTIONS, INC. (a Tennessee corporation) and subsidiary as of
December 29, 1995 and December 27, 1996 and the related consolidated statements
of income, shareholders' equity and cash flows for each of the three fiscal
years in the period ended December 27, 1996. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
CorporateFamily Solutions, Inc. and subsidiary as of December 29, 1995 and
December 27, 1996 and the results of their operations and their cash flows for
each of the three fiscal years in the period ended December 27, 1996, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Nashville, Tennessee
March 14, 1997, except for Note 13, as to which
the date is July 17, 1997.
F-2
<PAGE> 53
CORPORATEFAMILY SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 29, DECEMBER 27, JUNE 27,
1995 1996 1997
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................. $ 1,584,597 $ 2,913,388 $ 2,854,911
Restricted cash....................................... 608,980 168,858 172,466
Accounts receivable, less allowance of $84,000,
$123,000, and $122,000, respectively............... 3,478,292 5,304,678 5,137,133
Prepaid expenses...................................... 225,319 188,435 82,978
Current deferred tax asset............................ 700,365 969,823 871,629
------------ ------------ -----------
Total current assets.......................... 6,597,553 9,545,182 9,119,117
PROPERTY AND EQUIPMENT, net............................. 3,928,095 3,757,201 3,631,246
INTANGIBLE ASSETS, net.................................. 6,240,499 5,752,813 5,552,327
NONCURRENT DEFERRED TAX ASSET........................... -- 1,012,396 650,739
OTHER ASSETS............................................ 288,727 311,128 437,791
------------ ------------ -----------
Total assets.................................. $ 17,054,874 $ 20,378,720 $19,391,220
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt.................. $ 657,463 $ 911,000 $ 911,000
Trade accounts payable................................ 813,850 1,289,050 391,703
Income tax payable.................................... -- 137,743 6,974
Accrued expenses:
Payroll and related benefits....................... 2,922,363 3,342,788 3,639,914
Other.............................................. 734,437 1,257,391 979,040
Deferred revenue, current portion..................... 258,295 332,117 62,855
Other current liabilities............................. 195,083 336,765 424,574
Amounts held in escrow................................ 608,980 168,858 172,466
------------ ------------ -----------
Total current liabilities..................... 6,190,471 7,775,712 6,588,526
LONG-TERM DEBT, net of current portion.................. 4,406,195 3,504,673 3,049,360
DEFERRED REVENUE, net of current portion................ 1,095,639 978,722 920,263
OTHER LONG-TERM LIABILITIES............................. 1,347,863 1,143,992 1,161,396
------------ ------------ -----------
Total liabilities............................. 13,040,168 13,403,099 11,719,545
------------ ------------ -----------
COMMITMENTS, CONTINGENCIES AND GUARANTEES (See Note 9)
SHAREHOLDERS' EQUITY:
Series A preferred stock, no par value; authorized,
5,000,000 shares; issued and outstanding, 1,125,000
shares............................................. 4,450,932 4,480,372 4,480,372
Common stock, no par value; authorized, 10,000,000
shares; issued and outstanding, 1,818,018,
1,866,203 and 1,896,913, respectively.............. 6,680,894 6,906,114 7,056,334
Accumulated deficit................................... (7,117,120) (4,410,865) (3,865,031)
------------ ------------ -----------
Total shareholders' equity.................... 4,014,706 6,975,621 7,671,675
------------ ------------ -----------
Total liabilities and shareholders' equity.... $ 17,054,874 $ 20,378,720 $19,391,220
========== ========== ==========
</TABLE>
The accompanying notes to the consolidated financial statements
are an integral part of these balance sheets.
F-3
<PAGE> 54
CORPORATEFAMILY SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------------------------- SIX MONTHS ENDED
DECEMBER -------------------------
DECEMBER 30, DECEMBER 29, 27, JUNE 28, JUNE 27,
1994 1995 1996 1996 1997
------------ ------------ ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE......................... $ 24,512,981 $ 36,919,884 $62,926,075 $30,078,887 $36,380,776
EXPENSES:
Operating..................... 21,091,613 32,707,762 55,588,596 26,478,632 32,028,340
Selling, general and
administrative............. 2,957,808 3,525,017 4,659,000 2,363,067 2,784,870
Depreciation and
amortization............... 387,363 519,948 758,553 381,008 397,025
------------ ------------ ----------- ----------- -----------
OPERATING INCOME................ 76,197 167,157 1,919,926 856,180 1,170,541
INTEREST EXPENSE, NET........... 49,720 86,544 343,048 193,727 124,707
------------ ------------ ----------- ----------- -----------
INCOME BEFORE INCOME TAXES...... 26,477 80,613 1,576,878 662,453 1,045,834
------------ ------------ ----------- ----------- -----------
INCOME TAX BENEFIT (EXPENSE):
Current....................... (500) (7,889) (142,000) (26,502) (40,149)
Deferred...................... -- 468,458 1,300,817 -- (459,851)
------------ ------------ ----------- ----------- -----------
(500) 460,569 1,158,817 (26,502) (500,000)
------------ ------------ ----------- ----------- -----------
NET INCOME...................... $ 25,977 $ 541,182 $ 2,735,695 $ 635,951 $ 545,834
========== ========== ========== ========== ==========
NET INCOME PER SHARE............ $ 0.01 $ 0.19 $ 0.75 $ 0.20 $ 0.17
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-4
<PAGE> 55
CORPORATEFAMILY SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
SERIES A
PREFERRED STOCK COMMON STOCK,
NO PAR VALUE NO PAR VALUE
---------------------- ---------------------- ACCUMULATED
SHARES AMOUNT SHARES AMOUNT DEFICIT TOTAL
--------- ---------- --------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31,
1993..................... 1,125,000 $4,392,052 1,508,309 $4,907,734 $(7,494,345) $1,805,441
Receipt and retirement of
outstanding shares.... -- -- (19,186) -- (131,054) (131,054)
Stock options
exercised............. -- -- 46,150 23,160 -- 23,160
Escrow stock canceled.... -- -- (42,250) -- -- --
Accretion of preferred
stock................. -- 29,440 -- -- (29,440) --
Net income............... -- -- -- -- 25,977 25,977
--------- ---------- --------- ---------- ----------- ----------
BALANCE, December 30,
1994..................... 1,125,000 4,421,492 1,493,023 4,930,894 (7,628,862) 1,723,524
Acquisition of RCCM...... -- -- 324,995 1,750,000 -- 1,750,000
Accretion of preferred
stock................. -- 29,440 -- -- (29,440) --
Net income............... -- -- -- -- 541,182 541,182
--------- ---------- --------- ---------- ----------- ----------
BALANCE, December 29,
1995..................... 1,125,000 4,450,932 1,818,018 6,680,894 (7,117,120) 4,014,706
Issuance of stock
options............... -- -- -- 100,000 -- 100,000
Stock options
exercised............. -- -- 15,685 97,220 -- 97,220
Issuance of stock........ -- -- 32,500 28,000 -- 28,000
Accretion of preferred
stock................. -- 29,440 -- -- (29,440) --
Net income............... -- -- -- -- 2,735,695 2,735,695
--------- ---------- --------- ---------- ----------- ----------
BALANCE, December 27,
1996..................... 1,125,000 4,480,372 1,866,203 6,906,114 (4,410,865) 6,975,621
Stock options exercised
(Unaudited)........... -- -- 30,710 150,220 -- 150,220
Net income (Unaudited)... -- -- -- -- 545,834 545,834
--------- ---------- --------- ---------- ----------- ----------
BALANCE, June 27, 1997
(Unaudited).............. 1,125,000 $4,480,372 1,896,913 $7,056,334 $(3,865,031) $7,671,675
======== ========= ======== ========= ========== =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-5
<PAGE> 56
CORPORATEFAMILY SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS ENDED
------------------------------------------ -------------------------
DECEMBER 30, DECEMBER 29, DECEMBER 27, JUNE 28, JUNE 27,
1994 1995 1996 1996 1997
------------ ------------ ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................... $ 25,977 $ 541,182 $2,735,695 $ 635,951 $ 545,834
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization............... 387,363 519,948 758,553 381,008 397,025
Other noncash expense....................... -- -- 68,000 28,000 --
Deferred tax expense (benefit).............. -- (468,458) (1,300,817) -- 459,851
Loss on disposal of assets.................. -- 159,009 68,975 68,975 21,077
Changes in assets and liabilities:
Decrease (increase) in accounts
receivable.............................. (508,481) (542,592) (1,826,386) (199,784) 167,545
Decrease (increase) in prepaid expenses... 49,124 (72,617) 36,884 112,537 105,457
Increase (decrease) in accounts payable
and accrued expenses.................... 548,356 595,993 1,575,285 397,382 (1,009,341)
Increase in other current liabilities..... 32,720 162,363 141,682 91,316 87,809
Increase (decrease) in deferred revenue... 13,478 (26,977) (43,095) 99,883 (327,721)
Increase (decrease) in other long-term
liabilities............................. 121,481 (53,014) (203,871) (131,962) 17,404
Increase (decrease) in other noncurrent
assets.................................. (12,847) (44,502) 37,599 57,130 (126,663)
------------ ------------ ------------ ----------- -----------
Net cash provided by operating
activities.......................... 657,171 770,335 2,048,504 1,540,436 338,277
------------ ------------ ------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment............ (148,500) (514,382) (168,948) (80,290) (91,661)
Increase in intangible assets................. -- (35,000) -- -- --
Purchase of assets of Morris & Moran
Associates, Inc............................. (410,000) -- -- -- --
Purchase of capital stock of RCCM............. -- (3,612,943) -- -- --
------------ ------------ ------------ ----------- -----------
Net cash used in investing
activities.......................... (558,500) (4,162,325) (168,948) (80,290) (91,661)
------------ ------------ ------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt financing related to acquisition......... 300,000 3,500,000 -- -- --
Payments on long-term debt.................... (185,299) (438,396) (647,985) (230,438) (455,313)
Proceeds from issuance of common stock........ 23,160 -- 97,220 96,570 150,220
------------ ------------ ------------ ----------- -----------
Net cash provided by (used in)
financing activities................ 137,861 3,061,604 (550,765) (133,868) (305,093)
------------ ------------ ------------ ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................... 236,532 (330,386) 1,328,791 1,326,278 (58,477)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD........................................ 1,678,451 1,914,983 1,584,597 1,584,597 2,913,388
------------ ------------ ------------ ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD...... $1,914,983 $1,584,597 $2,913,388 $2,910,875 $2,854,911
============ ============ ============ =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash payments of interest..................... $ 66,781 $ 135,814 $ 455,849 $ 263,340 $ 189,453
============ ============ ============ =========== ===========
Cash payments of income taxes................. $ -- $ -- $ -- $ -- $ 170,918
============ ============ ============ =========== ===========
NON CASH INVESTING ACTIVITIES:
Issuance of options in exchange for consulting
services.................................... $ -- $ -- $ 100,000 $ -- $ --
============ ============ ============ =========== ===========
Issuance of restricted common shares.......... $ -- $ -- $ 28,000 $ 28,000 $ --
============ ============ ============ =========== ===========
Accretion of preferred stock.................. $ 29,440 $ 29,440 $ 29,440 $ -- $ --
============ ============ ============ =========== ===========
Issuance of common stock in connection with
acquisition of RCCM......................... $ -- $1,750,000 $ -- $ -- $ --
============ ============ ============ =========== ===========
Receipt of 19,186 common shares from director
for payment of notes receivable............. $ 131,054 $ -- $ -- $ -- $ --
============ ============ ============ =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-6
<PAGE> 57
CORPORATEFAMILY SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE SIX MONTH PERIODS ENDED JUNE 28, 1996 AND JUNE 27, 1997 IS
UNAUDITED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
CorporateFamily Solutions, Inc. (the "Company" and formerly Corporate Child
Care, Inc.) was incorporated under the laws of the state of Tennessee on
February 1, 1987 for the purpose of developing and managing Family Centers. The
Company is a leading national provider of a broad range of management and
consulting services for employers seeking to provide their employees with child
care services and other family support programs. The Company operates and
manages employer-sponsored Family Centers, built and equipped by the employer at
or near its offices, providing such services as early childhood education, child
care, back-up child care, kindergartens, get-well care, summer camps and parent
support services. In addition, the Company provides work/life consulting
services to help employers realize the benefits of work and family programs and
policies and to align work/life concerns of working families with business
strategies of employers. Consulting services provided by the Company include
feasibility studies, work/life strategic planning, return on investment
analyses, and development of work/life programs and policies. The Company
operates and manages employer-sponsored Family Centers for major corporations,
healthcare and governmental entities located throughout the United States.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
CorporateFamily Solutions, Inc. and its wholly-owned subsidiary Resources for
Child Care Management, Inc. ("RCCM"). References to the Company in these notes
include CorporateFamily Solutions, Inc. and its subsidiary on a consolidated
basis. All significant intercompany balances and transactions have been
eliminated in consolidation.
CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with an original
maturity of three months or less to be cash equivalents.
RESTRICTED CASH
In connection with the acquisition of RCCM in 1995 (see Note 2), the
Company is required to maintain cash in escrow pending the final resolution of
certain tax matters associated with RCCM prior to the acquisition date. The
majority of the tax matters were resolved in 1996.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciated on a
straight-line basis over the estimated useful lives of the assets as follows:
furniture and equipment -- 3 to 10 years; center improvements -- 3 to 10 years;
buildings -- 30 to 32 years. Expenditures for maintenance and repairs are
generally charged to expense as incurred, whereas expenditures for improvements
and replacements are capitalized.
The cost and accumulated depreciation of assets sold or otherwise disposed
of are removed from the accounts and the resulting gain or loss is reflected in
the consolidated statements of income.
Property and equipment obtained through purchase acquisitions are stated at
the estimated fair value determined on the respective dates of acquisition.
F-7
<PAGE> 58
CORPORATEFAMILY SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INTANGIBLE ASSETS
In connection with acquisitions, the Company has entered into various
noncompete agreements with certain individuals and assumed certain management
contracts. The estimated values allocated to such contracts are amortized on a
straight-line basis over the terms of the respective contracts.
The excess of the aggregate purchase price over the fair value of assets of
businesses acquired (goodwill) is being amortized on a straight-line basis over
a period of 18 to 20 years.
Subsequent to an acquisition, the Company continually evaluates whether
later events and circumstances have occurred that indicate the remaining
estimated useful life of its intangible assets may warrant revision or that the
remaining balance of such assets may not be recoverable. When factors indicate
that such assets should be evaluated for possible impairment, the Company uses
an estimate of the acquired operation's undiscounted cash flows over the
remaining life of the asset in measuring whether the asset is recoverable.
DEFERRED REVENUE
Deferred revenue results from employer-sponsor advances (see Note 3), and
cash received on uncompleted consulting or development projects.
OTHER CURRENT LIABILITIES
Other current liabilities consist primarily of amounts refundable to
clients pursuant to certain Family Center management contracts. Based on the
terms of certain Family Center management contracts, refundable profits may be
either reinvested in future Family Center operations, or refunded to the
employer-sponsors.
OTHER LONG-TERM LIABILITIES
Other long-term liabilities consist primarily of deposits held pursuant to
certain Family Center management contracts. The deposits will be remitted to the
clients upon termination of the respective contracts.
INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes", ("SFAS 109"). Under
the asset and liability method of SFAS 109, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
fiscal years in which those temporary differences are expected to be recovered
or settled. Under SFAS 109, the effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period that includes the
enactment date.
REVENUE RECOGNITION
Revenue from Family Center operations is recognized as services are
rendered. Revenue from consulting projects and from development activities is
recognized as the services are performed.
The Company maintains contracts with its customers to manage and operate
their Family Centers under various terms. The Company's contracts are generally
three to five years in length with annual renewals. Management expects to renew
the Company's existing contracts for periods consistent with the remaining
renewal options allowed by the contracts or other reasonable extensions.
F-8
<PAGE> 59
CORPORATEFAMILY SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONCENTRATIONS OF CREDIT RISK AND REVENUES
A significant number of the Company's customers are in the healthcare,
pharmaceutical, and financial service industries.
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation", ("SFAS 123"), encourages, but does not require,
companies to record compensation cost for stock-based employee compensation
plans at fair value. The Company has chosen to continue to account for employee
stock-based compensation using the intrinsic value method as prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees", ("APB Opinion No. 25"), and related Interpretations. Under APB
Opinion No. 25, no compensation cost related to employee stock options has been
recognized because all options are granted with exercise prices equal to or
greater than the estimated fair market value at the date of grant. See Note 7
for further discussion.
NET INCOME PER SHARE
The computation of net income per share is based on the weighted average
number of common shares and common equivalent shares outstanding during the
period. Common equivalent shares include stock options, warrants and preferred
stock, and are determined using the modified treasury stock method. See Note 8
for further discussion.
Statement of Financial Accounting Standards No. 128, "Earnings per Share",
("SFAS 128"), has been issued effective for fiscal periods ending after December
15, 1997. SFAS No. 128 establishes standards for computing and presenting
earnings per share. The Company is required to adopt the provisions of SFAS No.
128 in the fourth quarter of 1997. See Note 8 for further discussion.
FISCAL YEAR
The Company's fiscal year is the 52-53 week period ending on the Friday
nearest to December 31.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements as well as the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from these estimates.
NEW PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of", ("SFAS
121"). This statement imposes criteria for evaluating the recoverability of
long-term assets at each balance sheet date. The Company adopted SFAS 121
effective December 30, 1995. The Company did not experience a material impact on
its results of operations, financial conditions or cash flows as a result of
adoption.
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 129, "Disclosure of Information about Capital Structure", ("SFAS
129"). SFAS 129 establishes standards for disclosing information about an
entity's capital structure. The Company will be required to adopt SFAS 129 in
the fourth quarter of 1997. Management does not expect the adoption to have a
material impact on the Company's financial position, results of operation or
cash flows.
F-9
<PAGE> 60
CORPORATEFAMILY SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. ACQUISITIONS
Effective October 2, 1995, the Company acquired, through a reverse
subsidiary merger, RCCM. The Company was the surviving entity in the merger
which was accounted for as a purchase. The merger was consummated by the
exchange of 324,995 shares of the Company's common stock and $3,372,500 cash for
100% of the outstanding shares of RCCM's common stock. The principal shareholder
of RCCM also entered into an employment agreement and an agreement not to
compete with the Company (see Note 9). The total purchase price was $5,362,943,
which has been allocated to the assets acquired and liabilities assumed based on
their estimated fair values as follows:
<TABLE>
<S> <C>
Current assets.......................................................... $ 1,473,799
Property and equipment.................................................. 3,089,407
Goodwill................................................................ 5,740,203
Other assets............................................................ 15,259
Deferred tax assets, net................................................ 212,944
Current liabilities..................................................... (1,677,791)
Long-term debt.......................................................... (3,490,878)
-----------
$ 5,362,943
==========
</TABLE>
The results of RCCM's operations since the date of the acquisition have
been reflected in these consolidated financial statements.
The following unaudited pro forma information combines the consolidated
results of the Company and RCCM as if the acquisition had occurred on January 1,
1994, after giving effect to amortization of goodwill and interest expense on
borrowings to finance the acquisition. The pro forma information is not
necessarily indicative of the results of operations which would have been
obtained during such periods. While the Company believes that it will realize
certain long-term synergies through the integration of certain operating
functions, there can be no assurances that such synergies can be realized, and
no amounts have been reflected in the pro forma adjustments to reflect such
anticipated synergies.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------
DECEMBER 30, DECEMBER 29,
1994 1995
------------ ------------
(UNAUDITED)
<S> <C> <C>
Revenues.......................................................... $ 37,705,129 $ 48,733,113
========== ==========
Net loss.......................................................... $ (876,308) $ (634,530)
========== ==========
Net loss per share................................................ $ (0.48) $ (0.34)
========== ==========
</TABLE>
Effective April 18, 1994, the Company acquired certain assets of Morris &
Moran Associates, Inc. ("MMA") and assumed the management and operating
contracts for four employer sponsored Family Centers located in Florida. The
centers were previously managed and operated by MMA. The acquisition was
accounted for as a purchase and the results of operations since the date of
acquisition have been reflected in these consolidated financial statements. The
purchase price was allocated to the assets acquired based on their estimated
fair values as follows:
<TABLE>
<S> <C>
Furniture and equipment................................................... $ 50,000
Management contracts...................................................... 144,000
Goodwill.................................................................. 216,000
--------
$410,000
========
</TABLE>
F-10
<PAGE> 61
CORPORATEFAMILY SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
1995 1996
---------- -----------
<S> <C> <C>
Furniture and equipment.................................... $ 922,327 $ 1,075,282
Center improvements........................................ 735,669 744,016
Buildings.................................................. 3,082,009 3,089,653
Land....................................................... 54,100 54,100
---------- -----------
4,794,105 4,963,051
Less accumulated depreciation.............................. (866,010) (1,205,850)
---------- -----------
$3,928,095 $ 3,757,201
========= ==========
</TABLE>
Advances of $1,290,500 were received to fund the building of a child care
facility in Westchester County, New York. Such advances were recorded as
deferred revenue when received. The Company is required to maintain certain
standards relating to the ongoing operations of the center for a minimum
operating period as defined in agreements with the parties advancing the funds.
In the absence of default under agreements with these parties, repayment of the
funds received is forgiven on a pro-rata basis over a ten to fifteen year
period. The Company recognizes this forgiveness of the advances as income on the
same pro-rata basis. The Company recognized income of $77,944 and $116,917
during 1995 and 1996, respectively, and at December 29, 1995 and December 27,
1996, $1,212,556 and $1,095,639 of the original funding remains in deferred
revenue on the Company's consolidated balance sheets.
4. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Goodwill, net of amortization of $143,832 and $481,198...... $5,998,159 $5,614,218
Management contracts, net of amortization of $124,476 and
$151,866.................................................. 107,003 57,213
Noncompete agreements, net of amortization of $69,239 and
$99,239................................................... 80,761 50,761
Other....................................................... 54,576 30,621
---------- ----------
$6,240,499 $5,752,813
========= =========
</TABLE>
5. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Term loan, monthly principal payments of $58,333, commencing May
1996, plus interest at 9.75%, maturing August 1, 1998. The
maturity will be extended to April 1, 2001 provided the holders of
the Company's preferred stock have redeemed no more than $500,000
of preferred stock prior to August 1, 1998 and no event of default
exists. The interest rate may be reduced to 9.0% as long as the
Company meets certain debt to cash flow ratios as defined in the
agreement......................................................... $3,500,000 $3,033,333
Promissory note to bank, monthly payments of $5,655 including
interest at the bank's prime rate plus .5% (8.75% at December 27,
1996), maturing November 1, 1999.................................. 513,893 491,390
</TABLE>
F-11
<PAGE> 62
CORPORATEFAMILY SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Promissory note to bank, monthly payments of $4,403 including
interest at 9.875%, maturing April 15, 2010. The fixed interest
rate will be adjusted in April 2000 and again in April 2005 to 300
basis points in excess of the weekly average yield on five year
United States Treasury Securities................................. 400,000 391,092
Promissory note to bank, monthly principal payments of $10,000 plus
interest at 8%, maturing September 1, 1998........................ 374,765 289,858
Promissory note to bank, monthly principal payments of $5,000 plus
interest at 8.5%, maturing April 1, 1999.......................... 195,000 140,000
Note payable to shareholder, interest at 10%, principal and accrued
interest payable at maturity on June 30, 1998..................... 50,000 50,000
Note payable to shareholder, annual principal payments of $10,000
due through June 30, 1998, interest payable quarterly at 10%...... 30,000 20,000
---------- ----------
5,063,658 4,415,673
Less current maturities............................................. (657,463) (911,000)
---------- ----------
$4,406,195 $3,504,673
========= =========
</TABLE>
The notes payable to shareholders are secured by land and building with a
carrying value of approximately $198,000 at December 27, 1996.
The promissory notes to bank and the term loan are secured primarily by
accounts receivable, general intangibles, and substantially all of the Company's
furniture and equipment. The promissory notes contain certain restrictive
covenants with respect to minimum net worth, net income and cash flows as
defined in the note agreements as well as restrictions on the payment on cash
dividends. At December 27, 1996, the Company was in compliance with such
covenants.
Maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1997......................................................... $ 911,000
1998......................................................... 1,052,248
1999......................................................... 1,177,876
2000......................................................... 720,016
2001......................................................... 255,418
Thereafter................................................... 299,115
----------
$4,415,673
=========
</TABLE>
The Company has entered into a revolving line of credit agreement with a
bank for $500,000. Borrowings under the line bear interest at the bank's prime
rate plus 1.5% (9.75% at December 27, 1996) and are secured by a deed of trust
on certain real estate, a security interest in the Company's accounts
receivable, and certain furniture and equipment. No amounts have been advanced
under the line as of December 27, 1996. The line matures on May 1, 1997.
F-12
<PAGE> 63
CORPORATEFAMILY SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INCOME TAXES
Income tax benefit (expense) consisted of the following for the fiscal
years ended December 30, 1994, December 29, 1995, and December 27, 1996:
<TABLE>
<CAPTION>
1994 1995 1996
-------- --------- ----------
<S> <C> <C> <C>
Current tax expense.............................. $ (500) $ (7,889) $ (142,000)
Deferred tax expense............................. -- (101,449) (624,225)
Reduction in valuation allowance................. -- 569,907 1,925,042
-------- --------- ----------
Income tax benefit (expense), net...... $ (500) $ 460,569 $1,158,817
======== ========= =========
</TABLE>
A reconciliation of the U.S. Federal statutory rate to the effective rate
is as follows:
<TABLE>
<CAPTION>
1994 1995 1996
------- -------- ----------
<S> <C> <C> <C>
U.S. Federal statutory rate........................ $(9,002) $(27,408) $ (536,139)
State taxes on income.............................. (1,059) (3,225) (85,000)
Expenses not deductible............................ 9,561 (78,705) (145,086)
Change in valuation allowance...................... -- 569,907 1,925,042
------- -------- ----------
$ (500) $460,569 $1,158,817
======= ======== =========
</TABLE>
Significant components of the Company's deferred tax liabilities and
assets, using a tax rate of 38%, are as follows:
<TABLE>
<CAPTION>
1995 1996
----------- ----------
<S> <C> <C>
Current assets:
Reserves on assets....................................... $ 31,868 $ 46,927
Liabilities not yet deductible........................... 668,497 922,896
----------- ----------
Total current assets..................................... 700,365 969,823
========== =========
Noncurrent assets (liabilities):
Net operating loss carryforwards......................... 1,925,042 944,822
Other.................................................... (18,963) 67,574
----------- ----------
Noncurrent asset......................................... 1,906,079 1,012,396
Less valuation allowance................................. (1,925,042) --
----------- ----------
Net noncurrent asset (liability)......................... (18,963) 1,012,396
----------- ----------
Total net deferred tax asset..................... $ 681,402 $1,982,219
========== =========
</TABLE>
SFAS 109 requires the Company to record a valuation allowance when it is
"more likely than not that some portion or all of the deferred tax assets will
not be realized." It further states that "forming a conclusion that a valuation
allowance is not needed is difficult when there is negative evidence such as
cumulative losses in recent years."
The 1995 reduction in valuation allowance results from management's
determination during the fourth quarter of 1995 that it is more likely than not
that the deferred tax assets other than net operating losses would be realized.
Based on 1996 pre-tax income and projected future earnings, management
determined in the fourth quarter of 1996 that it is more likely than not that
the Company's net operating loss carryforwards are realizable. Therefore, the
remaining valuation allowance was removed in 1996.
The ultimate realization of this deferred income tax asset depends on the
Company's ability to generate sufficient taxable income in the future. If the
Company is unable to generate sufficient taxable income in the
F-13
<PAGE> 64
CORPORATEFAMILY SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
future through operating results or tax planning opportunities, increases in the
valuation allowance will be required through a charge to expense (decreasing
shareholders' equity).
At December 27, 1996, the Company had approximately $2.3 million of net
operating loss carryforwards for income tax purposes available to offset future
taxable income, which begin expiring in 2005.
7. SHAREHOLDERS' EQUITY
COMMON STOCK
The transferability of the Company's common stock is restricted by the
terms of a shareholders' agreement which gives the remaining shareholders a
right of first refusal and the Company a right of second refusal in any proposed
sale of the Company's common stock by a shareholder. The shareholders' agreement
will expire on completion of a qualified initial public offering, as defined
therein.
During 1996, the Company granted 32,500 shares of common stock to an
officer of the Company. The transferability of these shares is restricted by the
terms of a restricted stock award agreement between the officer and the Company.
Under the terms of the agreement, the Company retains a permanent right of first
refusal which allows it to repurchase the shares at the current book value in
any proposed sale of the stock by the officer. Compensation has been recorded
based on the book value of the security. In the event the Company removes the
right of first refusal it will be required to recognize compensation expense for
the difference between the then fair market value and book value of the
Company's common stock in the periods in which the restriction is removed.
SERIES A PREFERRED STOCK
The Series A Preferred Stock contains a $4.00 per share liquidation
preference over common stock in the event of any liquidation, dissolution or
winding up of the Company, whether voluntary or involuntary.
The Series A Preferred Stock is convertible to common stock at the option
of the preferred shareholder at any time at the conversion price as defined in
the Certificate of Designation Establishing Series of Shares ("Certificate").
Under the terms of the Certificate, each preferred shareholder has voting rights
on all matters and participates in dividends to common shares on an
"as-if-converted basis." The initial conversion is defined in the Certificate as
one share of common stock for each share of Series A Preferred Stock. Under the
terms of the Certificate, effective April 29, 1995, the conversion price was
modified, and the aggregate outstanding preferred shares are now convertible
into approximately 1,169,935 common shares. In the event that the Company
effects a public offering of its common stock at a designated offering price and
yielding net proceeds as defined in the Certificate, the preferred shares would
be automatically converted into common shares at the then effective conversion
price as defined in the Certificate. In the event that any public offering of
the Company's common stock does not meet the minimum offering price or net
proceed amounts defined in the agreement, the Company intends to obtain a
commitment from each preferred shareholder to convert the preferred shares to
common shares prior to the consummation of the public offering.
In the event any shares of Series A Preferred Stock have not been converted
to common stock by August, 1997 or upon the occurrence of a change in control of
the Company, as defined in the Certificate, each preferred shareholder has the
option to cause the Company to redeem the Series A Preferred Stock at $4.00 per
share plus any declared but unpaid dividends. The excess of the preferred
share's redemption value over the carrying value is being accreted by periodic
charges to retained earnings. The Company intends to seek a deferral of the
redemption option.
The transferability of the Company's Series A Preferred Stock is restricted
by the terms of a shareholders' agreement which gives certain other shareholders
a right of first refusal in any proposed sale of the Company's preferred stock
by a shareholder.
F-14
<PAGE> 65
CORPORATEFAMILY SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STOCK OPTIONS
The Company has two stock incentive plans, the 1987 Stock Option Plan and
the 1996 Stock Incentive Plan, which provide for qualified and non-qualified
incentive stock option grants and other stock based awards for which options may
be granted to "key employees" as designated by the Board of Directors. These
options are exercisable commencing on dates specified in the option agreements.
The options expire at the earlier of ten years from date of grant or three
months after termination of the holder's employment with the Company. The
exercise prices on stock options granted to date range from $4.62 to $7.69 per
share.
The Company periodically issues options to members of its Board of
Directors. These options have the same terms and conditions as the options
issued to employees and expire at the earlier of ten years from date of grant or
three months after termination of service as a member of the Board of Directors.
The Company accounts for options issued to employees and Directors under
APB Opinion No. 25. All options are granted with exercise prices equal to or
greater than management's estimate of the fair value of the Company's common
stock on the date of grant. As a result, no compensation cost has been
recognized.
SFAS 123 establishes new financial accounting and reporting standards for
stock-based compensation plans. The Company has adopted the disclosure-only
provision of SFAS 123. As a result, no compensation cost has been recognized for
the Company's employee stock option plans. Had compensation cost for the
employee stock option plans been determined based on the fair value at the grant
date for awards in 1995 and 1996 consistent with the provisions of SFAS 123, the
Company's net income and earnings per share would have been reduced to the
following pro forma amounts for the 1995 and 1996 fiscal years:
<TABLE>
<CAPTION>
1995 1996
-------- ----------
<S> <C> <C> <C>
Net income: As reported...................................... $541,182 $2,735,695
======== =========
Pro forma........................................ $434,164 $2,431,780
======== =========
EPS: As reported...................................... $ 0.19 $ 0.75
======== =========
Pro forma........................................ $ 0.16 $ 0.68
======== =========
</TABLE>
Because the SFAS 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
The fair value of each option on its date of grant has been estimated for
pro forma purposes using the Black-Scholes option pricing model using the
following weighted average assumptions:
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Expected dividend yield......................................... 0.00% 0.00%
Expected stock price volatility................................. 0.00 0.00
Risk free interest rate......................................... 7.82 5.58
Expected life of options........................................ 10 years 10 years
</TABLE>
F-15
<PAGE> 66
CORPORATEFAMILY SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the status of the Company's option plans, including options
issued to members of the Board of Directors, is as follows for the 1994, 1995
and 1996 fiscal years:
<TABLE>
<CAPTION>
1994
---------
NUMBER OF
SHARES
---------
<S> <C>
Outstanding at beginning of period........................................ 463,847
Granted................................................................... 117,000
Exercised................................................................. (42,250)
Canceled.................................................................. (68,900)
---------
Outstanding at end of period.............................................. 469,697
========
Available for future grant................................................ 163,403
========
Exercisable............................................................... 251,073
========
</TABLE>
<TABLE>
<CAPTION>
1995
----------------------------
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Outstanding at beginning of period......................... 469,697 $ 5.65
Granted.................................................... 206,700 7.69
Exercised.................................................. -- --
Canceled................................................... (26,000) 6.66
--------- ------
Outstanding at end of period............................... 650,397 $ 6.57
======== =============
Available for future grant................................. 60,704
========
Exercisable................................................ 363,245 $ 5.78
======== =============
</TABLE>
<TABLE>
<CAPTION>
1996
----------------------------
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Outstanding at beginning of period......................... 650,397 $ 6.57
Granted.................................................... 490,425 7.69
Exercised.................................................. (15,685) 6.20
Canceled................................................... (32,091) 6.68
--------- ------
Outstanding at end of period............................... 1,093,046 $ 6.98
======== =============
Available for future grant................................. 318,994
========
Exercisable................................................ 446,513 $ 6.11
======== =============
</TABLE>
The weighted average contractual life remaining on options outstanding
under the above plans at December 27, 1996 is 7.5 years.
In addition to the above plans, the Company issued 32,500 options during
1996 to the vice chairman of its Board of Directors in exchange for consulting
services. The options have an exercise price of $7.69 per share and expire in
2005. In 1996, 13,000 of the options vested with the remainder vesting ratably
over the next three years. The options were valued under the provisions of SFAS
123 and appropriate compensation expense was recorded.
During 1995, the Company also issued 325,000 options to an employee and
former shareholder of RCCM. The options are exercisable at $7.69 per share and
will vest at a rate of 65,000 shares per year over a
F-16
<PAGE> 67
CORPORATEFAMILY SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
five year period unless the shareholder is terminated without cause prior to the
end of the vesting period, in which case all options will immediately vest and
will remain in effect until their expiration ten years after date of issuance.
The Company determined the intrinsic value of the options was not material.
STOCK PURCHASE WARRANTS
Prior to 1994, the Company issued 78,000 stock purchase warrants to a
shareholder. Warrants outstanding at December 29, 1995 and December 27, 1996,
total 80,275 and 52,000 respectively, and have exercise prices ranging from
$5.77 to $7.69 per share. The warrants have expiration dates ranging from
January of 1997 to January of 1998.
8. NET INCOME PER SHARE
Earnings per share is computed by dividing net income by the weighted
average number of common and common equivalent shares outstanding during the
fiscal year, which includes the additional dilution related to conversion of
stock options granted prior to June 19, 1996, Series A Preferred Stock and
warrants as computed under the modified treasury stock method. The additional
dilution related to stock options granted subsequent to June 18, 1996 has been
computed using the treasury stock method and has been included in common
equivalent shares outstanding for all periods presented.
The following table presents information necessary to calculate earnings
per share for the fiscal years ended December 30, 1994, December 29, 1995 and
December 27, 1996:
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ----------
<S> <C> <C> <C>
Net income....................................... $25,977 $541,182 $2,735,695
Plus earnings from common stock equivalent shares
(net of tax provision):
Reduction of interest expense.................. -- 95,900 277,143
Increase in investment income.................. -- -- 82,331
--------- --------- ----------
Adjusted net income.............................. $25,977 $637,082 $3,095,169
======== ======== =========
Weighted average common shares outstanding....... 1,531,907 1,614,454 1,903,278
Plus additional shares from common stock
equivalent shares:
Options and warrants........................... -- 613,449 1,028,885
Series A Preferred Stock....................... 1,169,935 1,169,935 1,169,935
--------- --------- ----------
Adjusted weighted average common shares
outstanding.................................... 2,701,842 3,397,838 4,102,098
======== ======== =========
</TABLE>
No adjustments relating to options and warrants have been made to net
income or weighted average common shares outstanding in calculating 1994 primary
earnings per share as the effect of such adjustments would have been
anti-dilutive.
In the fourth quarter of 1997, the Company will be required to adopt the
provisions of SFAS No. 128. Under the standards established by SFAS 128 earnings
per share is measured at two levels: basic earnings per share and diluted
earnings per share. Basic earnings per share is computed by dividing net income
by the weighted average number of common shares outstanding during the year.
Diluted earnings per share is computed by dividing net income by the weighted
average number of common shares after considering the additional dilution
related to preferred stock, options and warrants.
F-17
<PAGE> 68
CORPORATEFAMILY SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following pro forma amounts present the basic earnings per share and
diluted earnings per share as if the Company had adopted SFAS 128 in fiscal
1994:
<TABLE>
<CAPTION>
(PRO FORMA)
-------------------------
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Basic earnings per share.................................... $0.02 $0.34 $1.44
===== ===== =====
Diluted earnings per share.................................. $0.01 $0.19 $0.85
===== ===== =====
</TABLE>
9. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases various equipment, automobiles, office space and Family
Center facilities under non-cancelable operating leases. Rent expense was
approximately $575,000, $895,000, and $735,000 in 1994, 1995, and 1996,
respectively. Future minimum payments under non-cancelable operating leases are
as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING
-------------------------------------------------------------------------
<S> <C>
1997................................................................ $ 443,516
1998................................................................ 420,231
1999................................................................ 323,066
2000................................................................ 130,891
2001................................................................ 110,086
Thereafter.......................................................... 237,500
----------
Total.......................................................... $1,665,290
=========
</TABLE>
Future minimum lease payments include approximately $544,000 of lease
commitments which are guaranteed by third-parties pursuant to operating
agreements for Family Centers.
EMPLOYMENT AND NONCOMPETE AGREEMENTS
Subsequent to its acquisition of RCCM, the Company entered into an
employment agreement with a former shareholder of RCCM. The agreement contains
certain severance benefits including salary continuation until August 27, 1998
if the employee is terminated without cause prior to that date.
The same individual also entered into an agreement not to compete with the
Company. This agreement provides for the payment of an aggregate of $500,000,
payable in equal yearly installments of $100,000 to the individual beginning on
the earlier of January 1, 1999 or the date of closing of an initial public
offering, subject to certain limitations, in exchange for the individual's
commitment not to compete with the Company for a period of five years from the
date of his termination.
OTHER
The Company has been named as a defendant in a lawsuit in which the
plaintiff is seeking compensatory and punitive damages for injuries allegedly
sustained at a Family Center in Florida. The case is in the preliminary stages
of discovery and pleading, and the Company intends to defend its position
vigorously. Based on its present understanding of the case and the advice of its
counsel, management of the Company believes that the outcome of the case will
not have a material adverse effect on the Company's business, results of
operations or financial condition.
F-18
<PAGE> 69
CORPORATEFAMILY SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In addition to the litigation noted above, the Company is a defendant in
certain other legal matters in the ordinary course of business. Management
believes the resolution of the above noted litigation and other legal matters
will not have a material effect on the Company's financial condition or results
of operations.
The Company's Family Centers are subject to numerous federal, state and
local regulations and licensing requirements. Failure of a center to comply with
applicable regulations can subject it to governmental sanctions which could
require expenditures by the Company to bring its Family Centers into compliance.
10. EMPLOYEE BENEFIT PLAN
During 1996, the Company maintained a tax-exempt 401(k) Retirement Savings
Plan (the "Plan") for all full-time employees with over one year of service.
During 1996, employees could contribute up to the lesser of $9,500 or 20% of
their salaries, subject to IRS limitations. The Company does not make
contributions to the Plan.
During 1996, the Company's subsidiary RCCM, maintained a tax-exempt 401(k)
Retirement Savings Plan for employees with over 90 days of service. During 1996
employees could contribute up to the lesser of $9,500 or 20% of their salaries,
subject to IRS limitations. The Company made contributions of approximately
$41,000 in 1996.
Plan administrative expenses paid by the Company during 1994, 1995, and
1996 were $8,510, $8,250, and $30,484, respectively.
11. RELATED PARTY TRANSACTIONS
During 1994 and 1995, the Company maintained a verbal consulting agreement
with a member of the Company's Board of Directors for development and marketing
services. The agreement was terminated in December 1995 in connection with the
individual's resignation from the Board of Directors. Fees paid under this
agreement totaled $60,000 in 1994 and $61,000 in 1995.
The Company purchases food from a shareholder for use in several Company
managed Family Centers. Total food purchases from the shareholder during 1994,
1995, and 1996 fiscal years were approximately $330,000, $420,000, and $417,000,
respectively.
The Company has agreements with two shareholders to operate and manage
Family Centers for the shareholders' employees. Under the terms of the
agreements the Company receives annual management fees. During 1994, 1995, and
1996 fiscal years, the Company received management fees from the shareholders
totaling approximately $102,000, $68,000 and $134,000, respectively.
The Company has also entered into an agreement with the employer of one
member of its Board of Directors to operate and manage a Family Center and
provide consulting services on an ongoing basis. In return for its services
under this agreement, the Company received management fees of $0, $12,500,
$50,000 and consulting fees of $0, $0, $25,000, respectively for fiscal 1994,
1995 and 1996.
F-19
<PAGE> 70
CORPORATEFAMILY SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimated fair values of financial instruments is made in
accordance with the requirements of Statement of Financial Accounting Standards
No. 107, "Disclosures About Fair Value of Financial Instruments". The estimated
fair value amounts have been determined by the Company using available market
information and appropriate valuation methodologies.
CASH, ACCOUNTS RECEIVABLE, AND ACCOUNTS PAYABLE
The carrying amounts of these items are a reasonable estimate of their fair
value due to their short-term nature.
LONG-TERM DEBT
The estimated fair value of long-term debt is based on management's
estimate of the present value of estimated future cash flows discounted at the
current market rate for financial instruments with similar characteristics and
maturity. At December 27, 1996 such fair value approximates the carrying amounts
for long-term debt in the accompanying consolidated balance sheets.
13. STOCK SPLIT
On July 17, 1997, the Board of Directors approved a stock split in which
each existing share of the Company's common stock was exchanged for 0.65 shares
of common stock. All share and per share amounts have been retroactively
restated for all periods presented to reflect this stock split.
14. INTERIM FINANCIAL INFORMATION (UNAUDITED)
CONSOLIDATED FINANCIAL STATEMENTS
The consolidated balance sheet as of June 27, 1997 and the consolidated
statements of operations and cash flows for the periods ended June 28, 1996 and
June 27, 1997 have been prepared by the Company in accordance with the
accounting policies described in its annual financial statement for the year
ended December 27, 1996 and should be read in conjunction with the notes
thereto.
In the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial positions,
results of operations and changes in cash flows at June 27, 1997 and for all
periods presented have been made. The results of operations for the period ended
June 27, 1997 are not necessarily indicative of the operating results for the
full year.
NET INCOME PER SHARE
Net income per share is computed by dividing net income by the weighted
average number of common and common equivalent shares outstanding during the
period, which includes the additional dilution related to conversion of stock
options granted prior to June 19, 1996, preferred stock and warrants as computed
under the modified treasury stock method. The additional dilution related to
stock options granted subsequent to June 18, 1996 has been computed using the
treasury stock method and has been included in common equivalent shares
outstanding for all periods presented.
F-20
<PAGE> 71
CORPORATEFAMILY SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents information necessary to calculate earnings
per share for the six months ended June 28, 1996 and June 27, 1997:
<TABLE>
<CAPTION>
JUNE 28, JUNE 27,
1996 1997
----------- -----------
(UNAUDITED)
<S> <C> <C>
Net income.................................................. $635,951 $545,834
Plus earnings from common stock equivalent shares (net of
tax provision):
Reduction of interest expense.......................... 144,248 115,000
Increase in investment income.......................... 32,907 44,343
----------- -----------
Adjusted net income......................................... $813,106 $705,177
========= =========
Weighted average common shares outstanding.................. 1,897,332 1,911,297
Plus additional shares from common stock equivalent shares:
Options and warrants...................................... 1,014,848 990,880
Preferred shares.......................................... 1,169,935 1,169,935
----------- -----------
Adjusted weighted average common shares outstanding......... 4,082,115 4,072,112
========= =========
</TABLE>
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("SFAS 128"), has been issued effective for fiscal periods ending after December
15, 1997. SFAS 128 establishes standards for computing and presenting earnings
per share. The Company is required to adopt the provisions of SFAS 128 in the
fourth quarter of 1997. Under the standards established by SFAS 128, earnings
per share is measured at two levels: basic earnings per share and diluted
earnings per share. Basic earnings per share is computed by dividing net income
by the weighted average number of common shares outstanding during the year.
Diluted earnings per share is computed by dividing net income by the weighted
average number of common shares after considering the additional dilution
related to preferred stock, convertible debt, options and warrants.
The following pro forma amounts represent the basic earnings per share and
diluted earnings per share as if the Company had adopted SFAS 128 for the six
month periods presented:
<TABLE>
<CAPTION>
JUNE 28, JUNE 27,
1996 1997
----------- -----------
(UNAUDITED)
<S> <C> <C>
Basic earnings per share.................................... $0.34 $0.29
========= =========
Diluted earnings per share.................................. $0.20 $0.17
========= =========
</TABLE>
F-21
<PAGE> 72
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Resources for Child Care Management, Inc.
We have audited the accompanying consolidated statements of operations,
shareholders' equity and cash flows of Resources for Child Care Management, Inc.
(a New Jersey corporation) and subsidiaries for the nine months ended September
30, 1995. These statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the statements referred to above present fairly, in all
material respects, the results of operations and cash flows of Resources for
Child Care Management, Inc. and subsidiaries for the nine months ending
September 30, 1995, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Nashville, Tennessee
March 14, 1997
F-22
<PAGE> 73
RESOURCES FOR CHILD CARE MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
<S> <C>
Tuition, consultation and fee revenue........................................... $11,813,229
-----------
Center operating expenses....................................................... 10,985,900
Management and general expenses................................................. 1,849,545
-----------
12,835,445
-----------
Loss from operations............................................................ (1,022,216)
Interest expense................................................................ (8,572)
-----------
Loss before income tax.......................................................... (1,030,788)
-----------
Income tax expense (benefit) (Notes 1 and 5)
Current....................................................................... 30,007
Deferred...................................................................... (383,699)
-----------
(353,692)
-----------
Net loss.............................................................. $ (677,096)
==========
</TABLE>
See accompanying notes to financial statements.
F-23
<PAGE> 74
RESOURCES FOR CHILD CARE MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN TREASURY ACCUMULATED
STOCK CAPITAL STOCK DEFICIT TOTAL
------ ---------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994................ $558 $ 119,315 $ -- $ (378,202) $(258,329)
Net loss................................ -- -- -- (677,096) (677,096)
Purchase of treasury shares............. -- -- (25,000) -- (25,000)
------ ---------- -------- ----------- ---------
Balance, September 30, 1995............... $558 $ 119,315 $(25,000) $(1,055,298) $(960,425)
====== ======== ======== ========== =========
</TABLE>
See accompanying notes to financial statements.
F-24
<PAGE> 75
RESOURCES FOR CHILD CARE MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
<S> <C>
Cash flows from operating activities
Net loss........................................................................ $ (677,096)
-----------
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization.............................................. 68,332
Amortization of construction advance....................................... (48,715)
(Increase) decrease in assets
Accounts receivable...................................................... (833,757)
Deferred income taxes.................................................... (383,699)
Increase (decrease) in liabilities
Accounts payable......................................................... 409,930
Accrued salaries and vacation payable.................................... 464,910
Other accrued expenses................................................... 53,105
-----------
Total adjustments..................................................... (269,894)
-----------
Net cash used in operating activities................................. (946,990)
-----------
Cash flow from financing activities
Repurchase of common stock.................................................... (25,000)
Deferred income............................................................... 897,623
Increase in note payable to bank.............................................. 375,000
Repayment of long-term debt................................................... (27,444)
Working capital advances...................................................... 747,320
-----------
Net cash provided by financing activities............................. 1,967,499
-----------
Cash flows from investing activities
Additions to property and equipment........................................... (1,158,431)
Other......................................................................... 41,489
-----------
Net cash used in investing activities................................. (1,116,942)
-----------
Net decrease in cash............................................................ (96,433)
Cash, beginning period.......................................................... 96,433
-----------
Cash, end of period............................................................. $ --
==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest................................................................... $ 54,400
==========
Income taxes............................................................... $ --
==========
</TABLE>
See accompanying notes to financial statements.
F-25
<PAGE> 76
RESOURCES FOR CHILD CARE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) NATURE OF BUSINESS
Resources for Child Care Management, Inc. and Subsidiaries (the "Company")
provides consulting services and develops and operates workplace child care
programs in response to the work/family issues affecting the employees of its
corporate clients.
(B) CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, Resources for Child Care Management of
Florida, Inc. and Child Care Management Services, Inc. All significant
intercompany accounts and transactions have been eliminated in consolidation.
(C) REVENUE RECOGNITION
Revenue is recognized as services are performed. No allowance for doubtful
accounts has been established based on management's expectation of collections.
(D) PROPERTY AND EQUIPMENT
The cost of property and equipment (other than leasehold improvements) is
charged to operations over the estimated useful lives of the respective assets
using depreciation computed by the straight-line method as follows:
<TABLE>
<S> <C>
Building............................................................... 30-32 Years
Furniture, fixtures and equipment...................................... 3-10 Years
Office equipment....................................................... 5 Years
Leasehold improvements................................................. Life of lease
</TABLE>
Maintenance and minor repairs and replacements are charged directly to
operations. Major renewals and improvements are capitalized.
(E) FURNITURE, FIXTURES AND EQUIPMENT EXCHANGE
Under certain operating agreements, the Company contracts with their client
to purchase suitable furniture and equipment to set up the child care center. In
these instances the client advances funds to the Company. Title to any such
furnishings is retained by the client; unexpended funds are returned to the
client.
(F) WORKING CAPITAL ADVANCES
Each client under contract provides a working capital advance to fund the
operating expenses of the program until such program is fully operational. At
that time, any remaining balance becomes part of the operating budget. At the
end of each contract, the client has the option of requesting the return of any
working capital advance surplus in excess of expenses incurred.
(G) DEFERRED INCOME TAXES
Certain income and expense items are accounted for in different periods for
income tax purposes than for financial reporting purposes. Provisions for
deferred taxes are made in recognition of these timing differences.
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." This statement
requires a liability approach for measuring deferred taxes based on temporary
differences between the financial statement and tax bases of assets and
liabilities existing
F-26
<PAGE> 77
RESOURCES FOR CHILD CARE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
at each balance sheet date, using enacted tax rates for years in which taxes are
expected to be paid or recovered.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements as well as the reported amounts of revenue and expenses during the
reporting period. Actual results may differ from these estimates.
NOTE 2 -- PROPERTY AND EQUIPMENT
Property and equipment, at cost, consist of the following at September 30,
1995:
<TABLE>
<CAPTION>
<S> <C>
Building................................................................. $1,965,188
Furniture, fixtures and equipment........................................ 419,931
Leasehold improvements................................................... 23,133
----------
2,408,252
Less: Accumulated depreciation and amortization.......................... 262,177
----------
$2,146,075
=========
</TABLE>
Construction advances of $1,290,500 have been received to finance the
building of a child care facility in Westchester County, New York. Such advances
have been recorded as deferred revenue when received. The Company is required to
maintain certain standards relating to the ongoing operations of the center for
a minimum operating period as defined in agreements with the parties advancing
the funds. In the absence of default under agreements with these parties,
repayment of the funds received is forgiven on a pro-rata basis over a ten to
fifteen year period. The Company recognizes this forgiveness of the advances as
income on the same pro-rata basis. During the nine month period ended September
30, 1995 the Company recognized income of $48,715, and at September 30, 1995,
$1,241,785 of the original funding remains in deferred revenue on the Company's
consolidated balance sheet.
NOTE 3 -- NOTE PAYABLE -- BANK
The Company has a note payable to a bank totaling $200,000 as of September
30, 1995. The note bears interest at 1.75% over the bank's prime rate and is due
on demand. The note is secured by accounts receivable.
NOTE 4 -- LONG-TERM DEBT
Long-term debt consists of the following at September 30, 1995:
<TABLE>
<S> <C>
Promissory note to bank, monthly payments of $5,655 including interest at
the bank's prime rate plus .5% (9% at December 29, 1995), maturing
November 1, 1999........................................................ $518,748
Promissory note to bank, monthly payments of $4,403 including interest at
9.875%, maturing April 15, 2010. The fixed interest rate will be
adjusted in April 2000 and again in April 2005 to 300 basis points in
excess of the weekly average yield on five year United States Treasury
Securities.............................................................. 400,000
--------
918,748
Less current maturities................................................... (33,180)
--------
$885,568
========
</TABLE>
F-27
<PAGE> 78
RESOURCES FOR CHILD CARE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The promissory notes to bank are secured primarily by substantially all of
the Company's accounts receivable, furniture and equipment and buildings.
NOTE 5 -- INCOME TAXES
Deferred income taxes result from the use of the accrual basis of
accounting for financial statement reporting purposes and the cash basis of
accounting for income tax purposes and differences in the recording of
depreciation expense.
NOTE 6 -- LEASES
The company leases various equipment, automobiles, office space and child
care facilities under non-cancelable operating leases. Rent expense was
approximately $71,000 for the nine months ended September 30, 1995. Future
minimum payments under non-cancelable operating leases are as follows:
<TABLE>
<S> <C>
1996...................................................................... $158,662
1997...................................................................... 28,435
1998...................................................................... 22,000
1999...................................................................... 22,000
2000...................................................................... 22,000
</TABLE>
F-28
<PAGE> 79
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
of Resources for Child Care Management, Inc. and Subsidiaries
We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows of Resources for Child Care Management,
Inc. and Subsidiaries for the year ended December 31, 1994. These statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated statements referred to in the first
paragraph present fairly, in all material respects, the results of operations
and cash flows of Resources for Child Care Management, Inc. and Subsidiaries for
the year ended December 31, 1994, in conformity with generally accepted
accounting principles.
TRIEN, ROSENBERG, FELIX
ROSENBERG, BARR & WEINBERG
March 9, 1995, except note 8(f)
which is as of May 8, 1995.
F-29
<PAGE> 80
RESOURCES FOR CHILD CARE MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
<S> <C>
Tuition, consultation and fee revenue........................................... $13,192,148
-----------
Center operating expenses....................................................... 11,938,686
Management and general expenses................................................. 1,503,934
-----------
13,442,620
-----------
Loss from operations............................................................ (250,472)
Interest income................................................................. 2,629
-----------
Loss before income taxes........................................................ (247,843)
-----------
Income tax (credit) expense (Notes 1 and 7)
Current....................................................................... 1,149
Deferred...................................................................... (105,962)
-----------
(104,813)
-----------
Net loss.............................................................. $ (143,030)
==========
</TABLE>
See accompanying notes to statements.
F-30
<PAGE> 81
RESOURCES FOR CHILD CARE MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN ACCUMULATED
STOCK CAPITAL DEFICIT TOTAL
------ ---------- ----------- ---------
<S> <C> <C> <C> <C>
Balance, December 31, 1993*.......................... $556 $ 116,317 $(235,172) $(118,299)
Net loss........................................... -- -- (143,030) (143,030)
Capital contribution............................... 2 2,998 -- 3,000
------ ---------- ----------- ---------
Balance, December 31, 1994........................... $558 $ 119,315 $(378,202) $(258,329)
====== ======== ========= =========
</TABLE>
- ---------------
* Restated, see Note 2.
See accompanying notes to statements.
F-31
<PAGE> 82
RESOURCES FOR CHILD CARE MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1994
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
<S> <C>
Cash flows from operating activities Net loss.................................... $(143,030)
---------
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization............................................... 46,970
(Increase) decrease in assets
Accounts receivable....................................................... (83,546)
Prepaid expenses.......................................................... (8,235)
Deferred income taxes..................................................... (105,962)
Deposits.................................................................. (2,341)
Other..................................................................... (16,346)
Increase (decrease) in liabilities
Accounts payable.......................................................... 63,381
Accrued salaries and vacation payable..................................... 57,087
Income taxes payable...................................................... (33,941)
Other accrued expenses.................................................... 62,249
---------
Total adjustments...................................................... (20,684)
---------
Net cash used in operating activities.................................. (163,714)
---------
Cash flow from financing activities
Issuance of common stock....................................................... 3,000
Deferred income................................................................ 392,877
Increase in note payable -- bank............................................... 225,000
Repayment of long-term debt.................................................... (31,920)
Decrease in furniture, fixtures and equipment exchange......................... (23,970)
Working capital advances....................................................... 100,372
---------
Net cash provided by financing activities.............................. 665,359
---------
Cash flows from investing activities
Additions to property and equipment............................................ (432,737)
Increase in cash surrender value of life insurance............................. (12,687)
---------
Net cash used in investing activities.................................. (445,424)
---------
Net increase in cash............................................................. 56,221
Cash, beginning year............................................................. 40,212
---------
Cash, end of year................................................................ $ 96,433
=========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest.................................................................... $ 15,002
Income taxes................................................................ 35,090
</TABLE>
Supplemental schedule of noncash investing and financing activities:
During the year ended December 31, 1994, the Company assumed long-term debt
of $547,910 in connection with the purchase of property and equipment (see Note
6).
See accompanying notes to statements.
F-32
<PAGE> 83
RESOURCES FOR CHILD CARE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED STATEMENTS
DECEMBER 31, 1994
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) NATURE OF BUSINESS
Resources for Child Care Management, Inc. and Subsidiaries (the "Company")
provides consulting services and develops and operates workplace child care
programs in response to the work/family issues affecting the employees of its
corporate clientele.
(B) CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, Resources for Child Care Management of
Florida, Inc. and Child Care Management Services, Inc. All significant
intercompany accounts and transactions have been eliminated in consolidation.
(C) REVENUE RECOGNITION
Revenue is recognized as services are performed. No allowance for doubtful
accounts has been established based on management's expectation of collections.
(D) PROPERTY AND EQUIPMENT
The cost of property and equipment (other than leasehold improvements) is
charged to operations over the estimated useful lives of the respective assets
using depreciation computed by the straight-line method as follows:
<TABLE>
<S> <C>
Building............................................................... 39 Years
Furniture, fixtures and equipment...................................... 7-10 Years
Office equipment....................................................... 5 Years
Leasehold improvements................................................. Life of lease
</TABLE>
Maintenance and minor repairs and replacements are charged directly to
operations. Major renewals and improvements are capitalized.
(E) FURNITURE, FIXTURES AND EQUIPMENT EXCHANGE
Under certain operating agreements, the Company contracts with their client
to purchase suitable furniture and equipment to set up the child care center. In
these instances the client advances funds to the Company. Title to any such
furnishings is retained by the client, unexpended funds are returned to the
client.
(F) WORKING CAPITAL ADVANCES
Each client under contract provides a working capital advance to fund the
operating expenses of the program until such program is fully operational. At
that time, any remaining balance becomes part of the operating budget. At the
end of each contract, the client has the option of requesting the return of any
working capital advance surplus in excess of expenses incurred.
(G) DEFERRED INCOME TAXES
Certain income and expense items are accounted for in different periods for
income tax purposes than for financial reporting purposes. Provisions for
deferred taxes are made in recognition of these timing differences.
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." This statement
requires a liability approach for measuring deferred taxes based on temporary
differences between the financial statement and tax bases of assets and
liabilities existing
F-33
<PAGE> 84
RESOURCES FOR CHILD CARE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED STATEMENTS -- (CONTINUED)
at each balance sheet date, using enacted tax rates for years in which taxes are
expected to be paid or recovered.
NOTE 2 -- RESTATEMENT
Accumulated deficit has been restated to reflect the following:
<TABLE>
<CAPTION>
ACCUMULATED
DEFICIT
-----------
<S> <C>
Balance as of and for the year ended December 31, 1993, as previously
reported............................................................... $ 46,815
Restatements attributable to:
Salary expense accrual adjustment, less deferred income taxes of
$55,579............................................................. 82,877
Due from QCC written off, less deferred income taxes of $67,440........ 105,480
-----------
Balance as of and for the year ended December 31, 1993, as restated...... $ 235,172
=========
</TABLE>
NOTE 3 -- PROPERTY AND EQUIPMENT
Property and equipment, at cost, consist of the following at December 31,
1994:
<TABLE>
<CAPTION>
<S> <C>
Construction in progress (Note 8)........................................ $ 415,665
Building (Note 6)........................................................ 547,910
Furniture, fixtures and equipment........................................ 246,733
Office equipment......................................................... 35,138
Leasehold improvements................................................... 4,375
----------
1,249,821
Less: Accumulated depreciation and amortization.......................... 193,845
----------
$1,055,976
=========
</TABLE>
NOTE 4 -- SPLIT-DOLLAR INSURANCE RECEIVABLE
During the year ended December 31, 1994, the Company maintained a
split-dollar insurance policy on the life of the principal shareholder.
Spilt-dollar insurance receivable consists of premiums paid by the Company which
will be reimbursed from the proceeds of the policy.
NOTE 5 -- NOTE PAYABLE -- BANK
During 1994, the Company executed a $250,000 commercial note with the bank,
payable on demand and bearing interest at the bank's prime rate plus 1.75%. The
principal amount outstanding under the note at December 31, 1994 was $225,000.
The obligation is collateralized by accounts receivable.
NOTE 6 -- LONG-TERM DEBT
During 1994, the Company assumed a mortgage obligation of $47,910 in
connection with its acquisition of a building used as a day care facility. The
mortgage note bears interest at the bank's prime rate plus one-half percent per
annum and is repayable in monthly installments of $5,655, including interest,
through October 1999 when the outstanding principal balance of approximately
$433,000 is due.
F-34
<PAGE> 85
RESOURCES FOR CHILD CARE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED STATEMENTS -- (CONTINUED)
The mortgage obligation is personally guaranteed by the Company's principal
shareholder.
Minimum annual principal repayments are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
-------------------------------------------------------------------------- --------
<S> <C>
1995...................................................................... $ 19,500
1996...................................................................... 21,329
1997...................................................................... 23,330
1998...................................................................... 25,518
1999...................................................................... 456,515
--------
$546,192
========
</TABLE>
NOTE 7 -- INCOME TAXES
Deferred income taxes result from the use of the accrual basis of
accounting for financial statement reporting purposes and the cash basis of
accounting for income tax purposes, differences in the recording of depreciation
expense, and net operating losses which are available to offset future taxable
income.
The federal net operating losses expire as follows: $145,000 in 2007 and
$211,000 in 2009.
NOTE 8 -- COMMITMENTS AND CONTINGENCIES
(A) SAVINGS AND RETIREMENT PLAN
The Company established an employee savings and retirement plan effective
October 1, 1990, pursuant to Section 401(k) of the Internal Revenue Code.
Employees may contribute up to 15% of their salary, subject to maximum annual
contributions.
(B) EMPLOYEE BENEFITS
Under the Company's cafeteria benefit plan each salaried employee may
choose among health, dental, life and disability insurance, dependent care, and
retirement benefits. The Company contributes from $150 to $180 per month per
employee towards the cost of the selected options. The excess coverage cost is
deducted from the employee's salary on a pretax basis.
(C) CENTER OPERATING LEASES
The Company has entered into long-term operating leases for facilities and
transportation equipment through 2011 in connection with the operation of day
care facilities, as follows:
<TABLE>
<CAPTION>
TRANSPORTATION
YEAR ENDING DECEMBER 31 TOTAL FACILITIES EQUIPMENT
- ------------------------------------------------------------- -------- ---------- --------------
<S> <C> <C> <C>
1995......................................................... $ 54,880 $ 20,500 $ 34,380
1996......................................................... 50,187 20,500 29,687
1997......................................................... 26,017 20,500 5,517
1998......................................................... 20,500 20,500 --
1999......................................................... 20,500 20,500 --
Thereafter................................................... 246,000 246,000 --
-------- ---------- --------------
$418,084 $ 348,500 $ 69,584
======== ======== ==========
Rent expense for the year ended December 31, 1994............ $ 62,014 $ 28,250 $ 33,764
======== ======== ==========
</TABLE>
The facilities lease is subject to increases based on Consumer Price Index
adjustments. The facilities lease expires 2011; the Company has the option to
renew the lease for two additional five-year periods.
F-35
<PAGE> 86
RESOURCES FOR CHILD CARE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED STATEMENTS -- (CONTINUED)
(D) OPERATING LEASES -- ADMINISTRATION
The Company leases its administrative headquarters in Morristown, New
Jersey under a five-year lease expiring in October 1997. The Company pays all
gas and electric charges; the landlord pays for all maintenance and garbage
removal services. Rental payments are adjusted for actual yearly increases in
municipal real estate taxes.
The Company also leases transportation equipment for its administrative
headquarters under leases expiring through 1997.
These long-term operating leases require minimum annual rentals as follows:
<TABLE>
<CAPTION>
TRANSPORTATION
YEAR ENDING DECEMBER 31 TOTAL FACILITIES EQUIPMENT
- ------------------------------------------------------------- -------- ---------- --------------
<S> <C> <C> <C>
1995......................................................... $ 69,840 $ 55,992 $ 13,848
1996......................................................... 64,346 55,992 8,754
1997......................................................... 46,660 46,660 --
-------- ---------- --------------
$180,846 $ 158,644 $ 22,602
======== ======== ==========
Rent expense for the year ended December 31, 1994............ $ 65,941 $ 55,992 $ 9,949
======== ======== ==========
</TABLE>
(E) MAJOR CLIENTS
The Company earned revenue from major clients as follows for the year end
December 31, 1994:
<TABLE>
<CAPTION>
<S> <C>
Percentage of revenue......................................................... 38%
Number of major clients....................................................... 3
</TABLE>
(F) CONSTRUCTION IN PROGRESS
During 1994, the Company committed to construct a day care facility in
Westchester County, New York. The estimated cost of the facility is
approximately $2,110,000 (unaudited), which is expected to be funded as follows:
<TABLE>
<S> <C>
Client advances (unaudited)...................................... $1,710,000
Bank financing................................................... 400,000
----------
$2,110,000
=========
</TABLE>
Client advances of $392,877 (through December 31, 1994) and $797,235
(through May 8, 1995) have been received to finance the construction in
progress. Such advances are recorded as deferred income when received. The
deferred income will be amortized over 15 years, the minimum operating period as
defined in the Company's Operating Agreement with clients, commencing with the
opening of the day care facility. In the event of default by the Company under
the Operating Agreement, amounts advanced may have to be returned to the
clients.
On May 8, 1995 the Company executed a $400,000 commercial mortgage note
with a bank, repayable over 15 years (the "note"). The note is collateralized by
accounts receivable, the premises to be constructed and certain rights related
to such property. The note is personally guaranteed by the principal shareholder
of the Company.
F-36
<PAGE> 87
RESOURCES FOR CHILD CARE MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED STATEMENTS -- (CONTINUED)
The note bears interest at an adjustable rate as follows:
<TABLE>
<S> <C>
Through April 15, 2000.................. 9.875% per annum
From April 16, 2000
through April 15, 2005................ The 5-year U.S. Treasury Securities' rate
in effect at February 28, 2000, plus 3%
From April 16, 2005 through
April 15, 2010 (due date)............. The 5-year U.S. Treasury Securities' rate
in effect at February 28, 2005, plus 3%
</TABLE>
The note is repayable, (i) interest only through April 15, 1996, (ii) in
equal monthly installments of $4,403 which include principal and interest from
April 16, 1996 through April 15, 2000. The monthly installments shall be recast
at April 16, 2000 and again on April 16, 2006 to provide that the then
outstanding principal balance self-amortizes in equal monthly installments which
include principal and interest through April 15, 2010. Minimum annual principal
repayments are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
---------------------------- --------
<S> <C>
1995...................................................................... $ --
1996...................................................................... 10,335
1997...................................................................... 15,025
1998...................................................................... 16,578
1999...................................................................... 18,291
Thereafter................................................................ 339,771
--------
$400,000
========
</TABLE>
The Company is subject to certain restrictive financial covenants under the
note.
F-37
<PAGE> 88
Gatefold layout with a collage of pictures reflecting children, parents
and Family Centers. The text on the inside front cover states "CorporateFamily
Solutions Helping Companies and Families Work Together." On the gatefold page
in the center is a map of the United States which sets forth the 87 centers in
operation and the 17 centers under development. In addition, the map is
surrounded by additional pictures similar to those on the inside cover and
interspersed are the names and logos of 17 of the Company's clients. The
inside back cover states "CorporateFamily Solutions brings into a single, clear
focus the entire kaleidoscope of viewpoints on work/family issues - employees,
families and children." At the bottom of the inside back cover is the Company
name and logo.
<PAGE> 89
======================================================
No dealer, sales representative or any other person has been authorized to
give any information or to make any representations in connection with the
Offering other than those contained in this Prospectus and, if given or made,
such information or representations must not be relied upon as having been
authorized by the Company or any of the Underwriters. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any securities
other than the shares of Common Stock to which it relates or an offer to, or a
solicitation of, any person in any jurisdiction where such offer or solicitation
would be unlawful. Neither the delivery of this Prospectus nor any sale made
hereunder shall, under any circumstances, create an implication that there has
been no change in the affairs of the Company, or that information contained
herein is correct as of any time, subsequent to the date hereof.
----------------------------
TABLE OF CONTENTS
----------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary...................... 3
Risk Factors............................ 6
Use of Proceeds......................... 11
Dividend Policy......................... 11
Dilution................................ 12
Capitalization.......................... 13
Selected Consolidated Financial and
Operating Data........................ 14
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 15
Business................................ 22
Management.............................. 31
Principal and Selling Shareholders...... 39
Certain Transactions.................... 41
Description of Capital Stock............ 42
Shares Eligible for Future Sale......... 45
Underwriting............................ 47
Legal Matters........................... 48
Experts................................. 48
Additional Information.................. 49
Index to Consolidated Financial
Statements............................ F-1
</TABLE>
----------------------------
Until , 1997 (25 days after the date of this Prospectus), all dealers
effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This delivery requirement is in addition to the obligation of dealers to deliver
a Prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
======================================================
======================================================
2,350,000 SHARES
[CORPORATE FAMILY LOGO]
COMMON STOCK
------------------------
PROSPECTUS
------------------------
MONTGOMERY SECURITIES
J.C. BRADFORD & CO.
, 1997
======================================================
<PAGE> 90
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth an itemized estimate of fees and expenses
payable by the Registrant in connection with the Offering described in the
Registration Statement, other than underwriting discounts and commissions.
<TABLE>
<S> <C>
SEC registration fee.............................................................. $ 9,200
NASD fee.......................................................................... 3,536
Nasdaq Stock Market application fee............................................... 28,100
Accounting fees and expenses...................................................... 125,000*
Legal fees and expenses........................................................... 225,000*
Printing and engraving expenses................................................... 125,000*
Blue sky fees and expenses........................................................ 3,000*
Transfer agent and registrar fees................................................. 1,000*
Miscellaneous fees and expenses................................................... $180,164*
--------
Total................................................................... $700,000
========
</TABLE>
- ---------------
* Estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Tennessee Business Corporation Act ("TBCA") provides that a corporation
may indemnify any director or officer against liability incurred in connection
with a proceeding if (i) the director or officer acted in good faith, (ii) the
director or officer reasonably believed, in the case of conduct in his or her
official capacity with the corporation, that such conduct was in the
corporation's best interest, or, in all other cases, that his or her conduct was
not opposed to the best interests of the corporation, and (iii) in connection
with any criminal proceeding, the director or officer had no reasonable cause to
believe that his or her conduct was unlawful. In actions brought by or in the
right of the corporation, however, the TBCA provides that no indemnification may
be made if the director or officer is adjudged to be liable to the corporation.
Similarly, the TBCA prohibits indemnification in connection with any proceeding
charging improper personal benefit to director or officer, if such director or
officer is adjudged liable on the basis that a personal benefit was improperly
received. In cases where the director or officer is wholly successful, on the
merits or otherwise, in the defense of any proceeding instigated because of his
or her status as an director or officer of a corporation, the TBCA mandates that
the corporation indemnify the director or officer against reasonable expenses
incurred in the proceeding. Notwithstanding the foregoing, the TBCA provides
that a court of competent jurisdiction, upon application, may order that a
director or officer be indemnified for reasonable expense if, in consideration
of all relevant circumstances, the court determines that such individual is
fairly and reasonably entitled to indemnification, whether or not the standard
of conduct set forth above was met.
The Amended and Restated Charter (the "Charter") and Amended and Restated
Bylaws of the Company will provide that the Company will indemnify from
liability, and advance expenses to, any present or former director or officer of
the Company to the fullest extent allowed by the TBCA, as amended from time to
time, or any subsequent law, rule, or regulation adopted in lieu thereof.
Additionally, the Charter provides that no director of the Company will be
personally liable to the Company or any of its shareholders for monetary damages
for breach of any fiduciary duty except for liability arising from (i) any
breach of a director's duty of loyalty to the Company or its shareholders, (ii)
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) any unlawful distributions, or (iv) receiving
any improper personal benefit. The Company has entered into indemnification
agreements with each of the Company's directors and executive officers.
II-1
<PAGE> 91
The proposed form of the Underwriting Agreement filed as Exhibit 1 to this
Registration Statement contains certain provisions relating to the
indemnification of the Company and its controlling persons by the Underwriters
and relating to the indemnification of the Underwriters by the Company, its
controlling persons and the Selling Shareholders.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The Company has not issued unregistered securities during the past three
years, except as noted below:
Since June 1994, the Company has issued 46,456 shares of Common Stock
upon the exercise of stock options granted (i) to non-employee directors of
the Company and (ii) to employees pursuant to the Company's option plans,
with a weighted average exercise price of $5.32.
On October 2, 1995, the Company issued 324,995 shares of Common Stock
as consideration for the acquisition of all the shares of common stock of
RCCM, at an assumed price of $5.38 per share of the Company's Common Stock.
On April 18, 1996, the Company granted 32,500 shares of Common Stock
to Michael E. Hogrefe pursuant to a restricted stock award agreement in
consideration of services to be provided to the Company.
Each of the above issuances was completed pursuant to the exemption found
in Section 4(2) of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following exhibits are filed as part of the Registration Statement:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------------------------------------------------------------------------------
<C> <C> <S>
1+ -- Form of Underwriting Agreement
2+ -- Agreement and Plan of Merger among Corporate Child Care, Inc., CCC Acquisition
Corporation, Resources for Child Care Management, Inc., and Robert D. Lurie dated
August 27, 1995
3.1+ -- Amended and Restated Charter of Registrant
3.2+ -- Amended and Restated Bylaws of Registrant
4.1+ -- Specimen Common Stock certificate
4.2+ -- Article 7 of the Registrant's Amended and Restated Charter (included in Exhibit
3.1)
5+ -- Opinion of Bass, Berry & Sims PLC
10.1+ -- CorporateFamily Solutions, Inc. Employee Stock Purchase Plan
10.2+ -- CorporateFamily Solutions, Inc. 1997 Stock Incentive Plan
10.3+ -- Amended and Restated 1987 Stock Option Plan
10.4+ -- 1996 Stock Incentive Plan
10.5+ -- Employment Agreement of Robert D. Lurie dated August 27, 1995
10.6+ -- Agreement Not to Compete of Robert D. Lurie dated August 27, 1995
10.7+ -- Letter Agreement with Lamar Alexander dated August 26, 1996
10.8+ -- Form of Severance Agreement.
10.9+ -- Form of Commitment for Revolving Credit Agreement
10.10+ -- Form of Indemnification Agreement
10.11+ -- Registration Agreement dated August 29, 1991
10.12+ -- Stock Purchase Warrant dated January 15, 1993
</TABLE>
II-2
<PAGE> 92
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------------------------------------------------------------------------------
<C> <C> <S>
10.13+ -- Amendment to Registration Agreement dated July 18, 1997
10.14+ -- 1997 Outside Directors' Plan
21+ -- Subsidiaries of the Registrant
23.1 -- Consent of Arthur Andersen LLP
23.2 -- Consent of Arthur Andersen LLP
23.3 -- Consent of Trien, Rosenberg, Rosenberg, Weinberg, Ciullo & Fazzari, LLP
23.4+ -- Consent of Bass, Berry & Sims PLC (to be included in Exhibit 5)
24+ -- Power of Attorney (included in signature page)
27+ -- Financial Data Schedule (for SEC use only)
</TABLE>
- ---------------
+ Previously filed.
(b) The following report and schedule is filed as part of the Registration
Statement:
<TABLE>
<S> <C>
Report of Independent Public Accountants.......................... S-1
Schedule II -- Valuation and Qualifying Accounts.................. S-2
</TABLE>
No other schedules are required or are applicable.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the
Underwriters, at the closing specified in the Underwriting Agreement,
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 14 above, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer,
or controlling person of the Registrant in the successful defense of any action,
suit, or proceeding) is asserted by such director, officer, or controlling
person in connection with the securities being registered hereunder, the
Registrant will, unless in the opinion of its counsel the question has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 93
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Nashville, Tennessee on
August 11, 1997.
CORPORATEFAMILY SOLUTIONS, INC.
By: /s/ MARGUERITE W. SALLEE
------------------------------------
Marguerite W. Sallee
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ------------------------------ ----------------
<C> <S> <C>
/s/ MARGUERITE W. SALLEE President and Chief Executive August 11, 1997
- --------------------------------------------- Officer (Principal Executive
Marguerite W. Sallee Officer)
/s/ MICHAEL E. HOGREFE Executive Vice President, August 11, 1997
- --------------------------------------------- Chief Financial Officer and
Michael E. Hogrefe Secretary (Principal
Financial and Accounting
Officer)
/s/ ROBERT D. LURIE* Chairman of the Board and August 11, 1997
- --------------------------------------------- Director
Robert D. Lurie
/s/ LAMAR ALEXANDER* Vice Chairman of the Board and August 11, 1997
- --------------------------------------------- Director
Lamar Alexander
/s/ JOANNE BRANDES* Director August 11, 1997
- ---------------------------------------------
JoAnne Brandes
/s/ JERRY L. CALHOUN* Director August 11, 1997
- ---------------------------------------------
Jerry L. Calhoun
/s/ THOMAS G. CIGARRAN* Director August 11, 1997
- ---------------------------------------------
Thomas G. Cigarran
/s/ E. TOWNES DUNCAN* Director August 11, 1997
- ---------------------------------------------
E. Townes Duncan
/s/ JOSEPH J. GUZZO* Director August 11, 1997
- ---------------------------------------------
Joseph J. Guzzo
*By /s/ MARGUERITE W. SALLEE
- ---------------------------------------------
as Attorney-in-fact
</TABLE>
II-4
<PAGE> 94
NASHVILLE, TENNESSEE
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To CorporateFamily Solutions, Inc.:
We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements of CorporateFamily Solutions, Inc. and
subsidiary for the three years ended December 27, 1996 included in the Form S-1
and have issued our report thereon dated March 14, 1997, except for Note 13, as
to which the date is July 17, 1997. Our audits were made for the purpose of
forming an opinion on the basic consolidated financial statements taken as a
whole. The schedule listed under Item 16(b) is the responsibility of the
Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic consolidated financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth herein in relation to the basic
consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Nashville, Tennessee
March 14, 1997
S-1
<PAGE> 95
SCHEDULE II
CORPORATEFAMILY SOLUTIONS, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS
BEGINNING OF CHARGED TO COSTS DEDUCTIONS BALANCE AT
PERIOD AND EXPENSES(1) (CHARGE OFFS)(1) END OF PERIOD
------------ ---------------- ---------------- -------------
<S> <C> <C> <C> <C>
Year ended December 27, 1996:
Allowance for doubtful accounts........ $ 84,000 $ 58,000 $ 19,000 $ 123,000
========= ============ ============= ==========
Year ended December 29, 1995:
Allowance for doubtful accounts........ $ 45,000 $ 61,000 $ 22,000 $ 84,000
========= ============ ============= ==========
Year ended December 30, 1994:
Allowance for doubtful accounts........ $ 33,000 $ 18,500 $ 6,500 $ 45,000
========= ============ ============= ==========
</TABLE>
- ---------------
(1) Additions to the allowance for doubtful accounts are included in selling,
general and administrative expense. All deductions or charge offs are
charged against the allowance for doubtful accounts.
S-2
<PAGE> 96
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE
- ------ ------------------------------------------------------------------------ ----------
<C> <C> <S> <C>
1+ -- Form of Underwriting Agreement..........................................
2+ -- Agreement and Plan of Merger among Corporate Child Care, Inc., CCC
Acquisition Corporation, Resources for Child Care Management, Inc., and
Robert D. Lurie dated August 27, 1995...................................
3.1+ -- Amended and Restated Charter of Registrant..............................
3.2+ -- Amended and Restated Bylaws of Registrant...............................
4.1+ -- Specimen Common Stock certificate.......................................
4.2+ -- Article 7 of the Registrant's Amended and Restated Charter (included in
Exhibit 3.1)............................................................
5+ -- Opinion of Bass, Berry & Sims PLC.......................................
10.1+ -- CorporateFamily Solutions, Inc. Employee Stock Purchase Plan............
10.2+ -- CorporateFamily Solutions, Inc. 1997 Stock Incentive Plan...............
10.3+ -- Amended and Restated 1987 Stock Option Plan.............................
10.4+ -- 1996 Stock Incentive Plan...............................................
10.5+ -- Employment Agreement of Robert D. Lurie dated August 27, 1995...........
10.6+ -- Agreement Not to Compete of Robert D. Lurie dated August 27, 1995.......
10.7+ -- Letter Agreement with Lamar Alexander dated August 26, 1996.............
10.8+ -- Form of Severance Agreement.............................................
10.9+ -- Form of Commitment for Revolving Credit Agreement.......................
10.10+ -- Form of Indemnification Agreement.......................................
10.11+ -- Registration Agreement dated August 29, 1991............................
10.12+ -- Stock Purchase Warrant dated January 15, 1993...........................
10.13+ -- Amendment to Registration Agreement dated July 18, 1997.................
10.14+ -- 1997 Outside Directors' Plan............................................
21+ -- Subsidiaries of the Registrant..........................................
23.1 -- Consent of Arthur Andersen LLP..........................................
23.2 -- Consent of Arthur Andersen LLP..........................................
23.3 -- Consent of Trien, Rosenberg, Rosenberg, Weinberg, Ciullo & Fazzari,
LLP.....................................................................
23.4+ -- Consent of Bass, Berry & Sims PLC (to be included in Exhibit 5).........
24+ -- Power of Attorney (included in signature page)..........................
27+ -- Financial Data Schedule (for SEC use only)..............................
</TABLE>
- ---------------
+ Previously filed.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
dated March 14, 1997 included in or made a part of CorporateFamily Solutions,
Inc. registration statement, and to all references made to our Firm.
ARTHUR ANDERSEN LLP
Nashville, Tennessee
August 11, 1997.
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
on Resources for Child Care Management, Inc. dated March 14, 1997 included in
or made a part of CorporateFamily Solutions, Inc. registration statement, and
to all references made to our Firm.
ARTHUR ANDERSEN LLP
Nashville, Tennessee
August 11, 1997.
<PAGE> 1
EXHIBIT 23.3
CONSENT AND REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
We hereby consent to the use in this Registration Statement of our report dated
March 9, 1995, except Note 8(f) which is as of May 8, 1995 relative to the
consolidated financial statements (presented separately in the Registration
Statement) of Resources for Child Care Management, Inc. and Subsidiaries and to
the reference to our firm under the caption "experts" in the prospectus.
/s/ TRIEN, ROSENBERG, ROSENBERG,
WEINBERG, CIULLO & FAZZARI, LLP
-----------------------------------
TRIEN, ROSENBERG, ROSENBERG,
WEINBERG, CIULLO & FAZZARI, LLP
Morristown, NJ
August 11, 1997
